Bankruptcy Vs Chapter 13 Bankruptcy

Bankruptcy is defined as “a legal proceeding initiated by an individual or company that is unable to pay its debt” (Bankruptcy, 2003). Bankruptcy law is strictly federal law and the first federal Bankruptcy Act was enacted in 1878 (Textbook). Although bankruptcy was once considered shameful in the United States, it is now considered an acceptable way to resolve financial problems but it is typically a debtor’s last resort. Each year, approximately 1.5 million debtors file for personal bankruptcy, and approximately 40,000 businesses file for business bankruptcy (Textbook). Bankruptcy allows debtors a chance to start fresh financially while their creditors are still being paid. There are two categories that bankruptcy falls into: voluntary and …show more content…
In Chapter 7 bankruptcy the debtor can keep any income they receive after their debt has been discharged, but in Chapter 13 bankruptcy, income must be used to repay debt during the repayment period. The advantages of filing Chapter 7 bankruptcy include most secured debts being discharged, the process moves fairly quickly, and creditors cannot contact the debtor while the automatic stay is in effect or after the debt has been discharged (Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy). The advantages of filing Chapter 13 bankruptcy include being able to keep most personal property while setting up a payment plan to pay past due amounts, having three to five years to catch up on past due accounts, and having no direct contact with creditors for during the three to five year period (Chapter 7 Bankruptcy vs. Chapter 13 …show more content…
A means test, established under the BAPCPA, is used to identify these people and prevents them from filing a Chapter 7 bankruptcy. Abuse, defined as “discharging debts which debtors theoretically could afford,” is determined by the amount of disposable income available after expenses have been deducted (United States Attorneys’ Bulletin). If the amount of disposable income is over $100 or 25 percent of their unsecured claims, the potential of abuse arises (United States Attorneys’ Bulletin). If abuse is suspected, notice must be given to the debtor’s creditors within ten days of the debtor filing for Chapter 7 bankruptcy. If a family earns more than the state’s median income based on the previous six months, the debtor would likely have to file a Chapter 13 repayment plan. The goal of this test is for more people to have to file Chapter 13 bankruptcy so debts will not be discharged like they are in Chapter 7 (Bankrupty, 2010 Gale