I have met with thousands of different people to discuss their financial situation. Usually during the first meeting I am trying to determine if bankruptcy is a good option for them. I am a bankruptcy attorney. My entire practice is built on filing Chapter 7 and Chapter 13 bankruptcy cases. However, many of the people I meet with simply won’t benefit from a bankruptcy case, and as an attorney I have a fiduciary duty to my clients, meaning I must look out for their best interest.
When bankruptcy is the best solution to my client’s financial troubles, the next step is to determine whether they should file under Chapter 7 or Chapter 13. Choosing between these two types of bankruptcy largely depends on two factors: what they are trying to accomplish and eligibility for bankruptcy relief. The two most common reasons for filing bankruptcy are to discharge debt and to protect secured property. If the debtor is trying to protect property from foreclosure or repossession then Chapter 13 is the best option. Chapter 13 allows debtors to protect property with the automatic stay and to get caught up on their payments to secured creditors using the Chapter 13 plan. If the reason for filing bankruptcy is to discharge debt then Chapter 7 is the best choice, because it allows liability for unsecured debt to be eliminated without repayment.
Once I understand their goals in filing bankruptcy, I have to determine whether they are eligible for the Chapter that will best accomplish their goals. Eligibility to file a bankruptcy case usually is limited by prior discharges and disposable income. Debtors are limited in how often they can receive a discharge in bankruptcy. If someone files a Chapter 7 case and receives a discharge they will not be able to file again for eight years, so prior discharges can prevent a case from being filed. The second limiting factor for Chapter 7 relief is disposable income. Chapter 7 bankruptcy is reserved for people who cannot pay back their creditors. In order to determine whether a debtor qualifies I use a Means Test to calculate their disposable income. Too much disposable income means that the debtor isn’t eligible for Chapter 7 bankruptcy but may have to file Chapter 13 instead.
Once we have determined whether bankruptcy is a good option, and if so, which chapter is best suited to accomplish my client’s goals, and whether they are eligible for relief under that chapter, we have gone a long way towards forming a plan to resolve their money troubles. If for some reason we cannot file a bankruptcy case due to ineligibility or bankruptcy doesn’t make sense because it doesn’t improve their situation, then hopefully I am able to give them some advice on other steps they can take to resolve their financial problems.