If you make more than your state’s median income and are looking to clear away high, unsustainable debts through bankruptcy, and you have too much disposable income to qualify for a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be a good option for you.

With a Chapter 13 bankruptcy, your debts are reorganized and you often pay just portions of your outstanding debts to your creditors and you’re also able to keep your assets. It’s called Chapter 13 because it is contained within Chapter 13 of the U.S. Bankruptcy code.

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Here’s a closer look at the pros and cons of Chapter 13 bankruptcy.

Also known as a wage earner’s plan and re-organization bankruptcy, a Chapter 13 bankruptcy allows consumers to repay some of the debts they owe through a repayment plan lasting either 3 or 5 years. Once a repayment plan is complete, all other debts that are eligible for discharge during bankruptcy will be cleared away. A key advantage of filing for Chapter 13 is that you get to hold on to your assets, so if you’re worried about your nonexempt assets and property being at risk, then it may be an option to consider.

A Chapter 13 bankruptcy is noted on your credit record for up to seven years, three years less than with a Chapter 7 bankruptcy filing. In both instances, a public notice item of the bankruptcy is listed on your credit report. Individual accounts listed in your bankruptcy proceeding will be removed from your credit report within 7 years as well.

From a credit perspective, a Chapter 13 bankruptcy is more favorable than a Chapter 7 bankruptcy. It makes sense because with a Chapter 13 bankruptcy you are agreeing to re-organize and pay back a portion of the debts that you owe, whereas with a Chapter 7 bankruptcy, in many instances, debts may be cancelled without payment to creditors.

From a dollar and cents point of view, one disadvantage of a Chapter 13 bankruptcy is you’ll likely pay back more of the debts that you owe than you would in a Chapter 7 bankruptcy, but you also make good in even a small way on all the debts that you owe. All your creditors are likely to receive at least some payment from you when you file a Chapter 13 bankruptcy.

How Chapter 13 Repayment Plans Work

With a Chapter 13 bankruptcy repayment plan, you do agree to pay some debts in their entirety. These debts include child support, alimony, wages owed to employees and some taxes. Your repayment plan also includes your current secured debts such as auto and home loans and any overdue amounts owed on these loans.

After making these payments, any income that you have left gets applied to your unsecured debts such as credit cards, medical bills, and personal loans. With a Chapter 13, you won’t need to pay your unsecured debts in full, but you will need to show you are applying your remaining disposable income to this debt.

This type of bankruptcy is designed for consumers to re-organize their debts and pay back a portion of what they owe with future income, while maintaining their assets.

If you’re unable to complete your repayment plan in a Chapter 13 bankruptcy due to financial hardship such as being laid off from a job or a medical emergency, your bankruptcy trustee may modify your repayment plan or the court may allow you to discharge your debts due to hardship. Another option if you are unable to complete a repayment plan through a Chapter 13 bankruptcy is to convert to a Chapter 7 bankruptcy.

Lowering Your Repayment Plan

Claiming exemptions on assets and property will help to lower the amount that you’ll pay your creditors through a Chapter 13 bankruptcy proceeding. These exemptions vary from state to state, so it’s important to research the property exemptions you may claim in your state when filing. It will lessen the amount you ultimately owe your creditors and make your repayment plan more manageable.

There are federal exemptions for property and assets to consider, as well. You may wish to consult a local bankruptcy attorney to discuss the best exemption strategies for you as you contemplate bankruptcy.

Exceptions to the Chapter 7 Means Test

The U.S. Congress was concerned that too many higher income consumers were wiping away debts through Chapter 7 bankruptcy instead of paying back parts of their debts through a Chapter 13 bankruptcy proceeding, so in 2005, a law was passed establishing a means test for qualifying for Chapter 7.

Those who make less than the median income in their state may file a Chapter 7 bankruptcy without taking a means test, and those who make more than the median income must pass a means test first, but there are exceptions to this rule.

If 50 percent of your debts are non-consumer debts such as business debts, you won’t need to take a means test to qualify for Chapter 7 bankruptcy even if your income is above the state median. Disabled veterans, members of the National Guard and military reserve also may qualify for exceptions to the means test.

Everyone else earning more than the median income in the states where they live must take a means test to qualify for Chapter 7 bankruptcy. If it’s determined that you have too much disposable income, you won’t qualify, but Chapter 13 may still be a viable option for you.

Before qualifying for a Chapter 13 bankruptcy, you must complete credit counseling with an approved credit counseling agency. To find one near you, visit www.usdoj.gov/ust and scroll down to “Credit Counseling and Debtor Education”, or ask your bankruptcy attorney who they recommend to their clients.

Chapter 13 isn’t for Businesses

Businesses are unable to file a Chapter 13 bankruptcy in order to re-organize debt and should look to a Chapter 11 bankruptcy for that purpose instead. If you happen to own a business, you can still file a Chapter 13 bankruptcy as an individual and you can include business-related debts for which you are personally liable.

There are two exceptions. Stockbrokers and commodity brokers are not allowed to file a Chapter 13 bankruptcy for their personal debts.

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If your debts are unsustainable, and you have few assets, you may wish to clean the slate by filing for a Chapter 7 bankruptcy. Even those of us with assets we want to keep, such as your home or car, may find that it’s more suitable for their situation as well. As consumers, we will typically find we have two types of bankruptcy options. A Chapter 13 bankruptcy re-organizes a consumer’s debts and establishes a repayment plan rather than wiping the debts away like Chapter 7 bankruptcy.

I am going to focus on chapter 7.

The process takes three to six months and a Chapter 7 trustee oversees the process, selling a debtor’s non-exempt assets and then distributing the proceeds to creditors, according to the priorities established in the U.S. Bankruptcy Code.

Referred to as Chapter 7 because it is contained within Chapter 7 of the U.S. Bankruptcy code, this type of bankruptcy also is called a “liquidation” bankruptcy or a “straight” bankruptcy. This type of bankruptcy is the most popular form of bankruptcy in the United States.

No Asset Bankruptcy Cases

Most Chapter 7 bankruptcy cases that are filed in the United States are no-asset cases, meaning the debtor does not own any non-exempt assets, which could be sold to pay for debts owed to creditors. In a no-asset Chapter 7 bankruptcy case, a trustee will file a no asset report for your case and your creditors will not receive any payments from you through the bankruptcy proceedings.

Each state has its own set of exemptions that allow consumers to protect certain types of property and assets when filing for Chapter 7 bankruptcy. And there are federal exemptions as well. The reason behind the exemptions is the belief that you need a certain amount of assets and property to make a new start and sustain yourself and your family after filing bankruptcy.

For example, when you file bankruptcy a motor vehicle exemption may protect your family’s car. If all or most of your car’s equity is covered by a motor vehicle exemption, the trustee in a Chapter 7 bankruptcy filing will not be able to include your car when selling off assets to pay debts.

Making the Most of Property Exemptions

In Maine, the motor vehicle exemption is $5,000 so if you live in that state and your car is worth say, $4,500, the bankruptcy trustee will not be able to touch your car. In Florida, the motor vehicle exemption is just $1,000. In Kansas, this exemption is $20,000 when that vehicle is “regularly used for the transportation to and from a person’s regular place of work.”

In some states, these motor vehicle exemptions are higher for married couples and if the vehicle in question is equipped for people with disabilities.

Because of the range of exemptions, it is important to research the motor vehicle exemption in your state when contemplating bankruptcy. (Also be aware if you are delinquent on car payments, a lender may still be able to repossess your car before or after bankruptcy.)

Homes are another big consideration and exemption allowed in bankruptcy proceedings. Some or all of the equity that you’ve established in your home may be exempted in a Chapter 7 bankruptcy proceeding because of your state’s homestead exemption. As with motor vehicle exemptions, homestead exemptions vary greatly between states, so it’s important to research the laws where you live.

To learn more about the bankruptcy property exemptions in your state, reach out to a local bankruptcy attorney.

Pros and Cons of Chapter 7 Bankruptcy

As mentioned, Chapter 7 bankruptcy has a number of advantages for consumers. Filing this type of bankruptcy may allow you keep all or most of their assets thanks to exemptions. The whole process typically takes three to six months, which is shorter than other types of bankruptcy.

Upon completion of the bankruptcy, the consumer walks away essentially debt-free, other than loan payments for assets they were able to keep, their home and their car, plus any non-dischargeable debts, such as student loans, recent taxes and unpaid child support.

A Chater 7 bankruptcy will remain on your credit report for up to 10 years, whereas a completed Chapter 13 bankruptcy will remain for up to seven years. In both instances, a public record item associated with the filing of the bankruptcy is listed on your credit report. And impacted individual accounts will fall away from your credit report within seven years. So, a Chapter 7 bankruptcy does have a longer lasting negative impact on your credit by three years than a Chapter 13 bankruptcy would. But do not let these credit reporting facts fool you. People who file chapter 7 are in better shape to get new credit and meet life goals, like buying a home or car, long before someone who files chapter 13, and often before the many people who choose a bankruptcy alternative like debt settlement or credit counseling.

The Income Means Test

Because of income, not all consumers qualify for Chapter 7 bankruptcy.

A 2005 law added a means test, which was meant to prevent higher income debtors from cancelling their debts through Chapter 7 bankruptcy rather than repaying a portion of their debts through a Chapter 13 bankruptcy.

If your income is lower than the median income in your state then you will qualify for a Chapter 7 bankruptcy. But, if your income is higher than the median income in your state, you’ll have to pass a means test. This test compares your income and some expenses to see if you would be able to repay a portion of your unsecured debt.

But there are exceptions to taking this test if you do have higher income than your state’s median income. If 50 percent of your debts are non-consumer debts such as business debts, you may not need to take a means test to qualify for Chapter 7 bankruptcy.

Disabled veterans, members of the National Guard and military reserve also may qualify for exceptions to the means test.

Regardless of income, you must complete credit counseling with an approved credit counseling agency to qualify for a Chapter 7 bankruptcy. For a list of approved agencies in each state, visit www.usdoj.gov/ust and look for “Credit Counseling and Debtor Education.”

For a Chapter 7 bankruptcy, you will need to provide information on your current income and current living expenses, your property and assets, including property that you will be claiming that your state allows you to exempt from the proceedings.

If you have questions about how your state sees your assets as exempt, or whether you make too much money to file chapter 7, post in the comments below and include the state you live in.

Not all bankruptcy attorneys are created equal. That is not shocking. The same could be said about finding help in any profession or job that requires expertise and training. That said, finding the right bankruptcy attorney for you is not something that should prove difficult for most of us. But there are some things I would encourage you to both look, and look out for, when you go about consulting with attorneys and their staff.

Having worked with people to resolve problem debt by choosing bankruptcy alternatives for more than 20 years, I have referred more people to attorneys than to my main debt relief niche of debt settlement. That is not just because you should look at the pros and cons of bankruptcy as part of any due diligence into how to solve your debt problem, but because debt settlement cannot compete with chapter 7 bankruptcy for speed and overall cost when resolving problem debts for most people.

Chapter 7 attorney fees are not all that important.

Depending on the reason you need to hire an attorney, your fees can be all over the place. That is not the case with the amount of fees chapter 7 attorneys will charge. Their fees tend to be within a few hundred dollars of each other, and are often more related to where you live (coastal cities tend to have higher chapter 7 attorney fees than what those of us living inland often see).

Two reasons why attorney fees when filing chapter 7 bankruptcy stay fairly consistent:

1. If your chapter 7 filing does not involve many assets your case is going to be pretty straight forward. There will not be any notable amount of “lawyering” that will be necessary.
2. Bankruptcy judges and trustees would be alerted to uncommon, or inflated chapter 7 fees. And because court fees and costs are going to be uniform, there is not much  to elevate your average chapter 7 filing to total costs from A to Z anywhere over two thousand dollars. In other words, the court system keeps bankruptcy lawyers from fee gauging people filing no asset and uncomplicated chapter 7’s.

There are some exceptions that could require an attorney to incur more than the average amount of hours, such as attempting to discharge student loans, someone having multiple asset interests, and other things that can put a kink in a straight chapter 7 bankruptcy, but those are not the norm. And if you have special considerations in your bankruptcy, it would generally cause me to stress the importance of key attorney attributes and experiences that I cover below even more.

For these reasons, fees are not generally a part of what I suggest you use as a comparison for the bankruptcy attorney you ultimately hire. If you think that fees could be a concern, post more about your situation in the comments below. With that out of the way….

The good things to find in a bankruptcy attorney.

I have spent a good amount of years working with people to help them resolve their debt. My approach has nearly exclusively been to help people find the quickest path to not just debt relief, but to accomplishing the goals they have for when the “debt dust” settles (usually with a 2 to 3 year view). And sometimes the quickest path to relief from debt can work against reaching your goals. When that happens, you want to know about it.

I can candidly tell you that not everyone in the debt relief industry works with those two things prioritized, let alone telling you to spend your money and time on another option that is a better fit for reaching your goals, even if that means losing you as a customer or client. And just because an attorney has a dedicated practice in the area of consumer law (that is the category that chapter 7 and chapter 13 bankruptcy fall under), does not mean they are good at it, or that they are going to help you understand how to make the most of what is already a bad situation.

Here are some things you can immediately look for when consulting with bankruptcy attorneys, paralegals, and paraprofessionals offering debt relief assistance through bankruptcy.

• Are all of the questions you are being asked (yes, there will be many questions) dedicated to numbers and figures?

Details about your income and expenses are necessary, no doubt, you cannot start your bankruptcy without knowing what you can qualify to do, and with which accounts. But I find bankruptcy professionals are overly focused on this aspect of the process. I encourage people to listen for leading questions the attorney or other debt relief professionals should be asking. These questions can include:

• Do you or any of your children plan on applying for student loans in the next 3 years?

Bankruptcy can impact individual and parent plus or direct loans.

• Do you plan on staying in the home you barely have any equity in, or may be upside down on, and if so for how long?

If the home is more cost than you can keep up with anymore, and you are not in a great equity position, it can make sense to plan that out with your eventual bankruptcy filing in mind so that you can seek relief from real estate related debts through the bankruptcy process.

• Are you experiencing and immediate medical issues, or do you have any immediate medical needs?

If your health is not stable at the time of filing bankruptcy, it can often be better to delay your filing until you are more stable. But there are times where financial stress can cause, or aggravate existing health concerns.

• Is chapter 7 going to cause you to liquidate non exempt items that could be sold and the cash used to settle debts for less than what you owe?

It is entirely possible to avoid bankruptcy by negotiating lower payoffs with unsecured creditors. It is also silly for many people to use debt settlement as a way to avoid chapter 7 bankruptcy, both from a cost and lost time basis, and even from a psychological one. But it troubles me how many reports I get from consumers about how the bankruptcy attorney they consulted with never touched on the possibility of settling bills to avoid filing chapter 7, and especially as a way to keep out of chapter 13 repayment plans that are often inflexible and hard to complete.

Unless you’re pulling into bankruptcy court with a financial tank full of fumes (your out of money each month before your out of bills to pay), all of the above leading questions should be assessed by bankruptcy professionals. Your answers to those questions, and several others, may still have you filing chapter 7 bankruptcy, but perhaps on a 6 or 12 month delay, maybe even longer.

You may need legal relief from a wage garnishment, lien, levy, or to prevent a loss of property.  Bankruptcy can provide immediate relief from creditors right away. But unless you are in some type of financial emergency, you likely have time to consider why and when it is best for you to hire the attorney and proceed with bankruptcy.

For many people, finally reaching the decision to simply talk with a bankruptcy attorney was exhausting. As you go about gathering up information about the process, do not rush head long into filing if you do not need to right away. Slow down enough to not only make sure you are making the right choice, but that you are also maximizing the benefits that chapter 7 bankruptcy brings to what I know has already been a very difficult journey. And along that same line of thought, do not allow yourself to be rushed into filing bankruptcy by a bankruptcy professional.

Calling an attorney for bankruptcy help and information.

There is so much more to learn about bankruptcy beyond taking the first step to call or walk into an attorneys office. I will be covering much more about bankruptcy in coming posts.  I will wrap this one up by pointing out some obvious stuff.

• Do not take for granted that what you read about filing bankruptcy on line (including on my site) is accurate or the complete information you need. There are state specific concerns for bankruptcy, and a host of individualized things about your situation, that need to be discussed with bankruptcy professionals. That means consulting with someone about bankruptcy is important.
• Calling to consult with an attorney or their staff does not mean you are filing bankruptcy. It means you are gathering information you need. Those consults are going to be confidential, and many are offered at no cost. You can call the hotline I set up for a no cost consultation at 800-939-8357 and choose option 3.
• You can and should shop around for the attorney you want to hire. Just because you talked to one a month ago and got some helpful information, you are not obligated to hire that attorney. If something rubbed you wrong, they were not personable, or left off many of the types of things I talk about above that are very real concerns for you, I would suggest calling someone else.
• No cost bankruptcy consultations are common, but can also be relatively brief. Be sure to call back with additional questions that are sure to come up.
• Some attorneys will accept monthly payment plans when you are filing chapter 7 bankruptcy. They may not file your bankruptcy petition until you have paid their fee and covered courts costs and filing fees, but you can often get relief from debt collector calls and the like once you retain your attorney.
• There are some low income legal aid offices that provide discounted bankruptcy services to those who qualify.
• Just because you can squeak through with making payments on your debts each month does not mean you are not a perfect candidate for bankruptcy and a fresh start with your finances. I find people in this category to be some of the best candidates for chapter 7.
• If you are not being asked personal life and financial outlook types of questions by bankruptcy professionals you speak with (like those I covered above), I would question whether or not they are going to be looking out for your best interests.
• Don’t let debt relief professionals of any type skew your perception of how to resolve problem debts with talking points about how your credit scores can be hurt, and the damage to your credit reports that can occur. There is a ton of misinformation out there about how chapter 7 bankruptcy kills your credit, or cuts off access to financing. It doesn’t, at least not to the level you may be concerned about.