Passing a means test is the first stage in filing for Chapter 7 bankruptcy protection. This test is used to compare the debtor's income level to the state's median income level. The debtor's income must be below the state's median income level in order to qualify for Chapter 7 bankruptcy. The means test is the most important aspect of a Chapter 7 case because it determines which debtors are eligible to file. The means test does not require much participation from the applicant, but income and employment information must be provided in order to complete the test. The remaining stages of a Chapter 7 bankruptcy are comparable to those of a Chapter 13 bankruptcy.
The Chapter 7 benefits may fluctuate from case to case, but generally follow a similar pattern. The elimination of the vast majority of one's obligations is perhaps the most significant advantage of a Chapter 7 bankruptcy case. In addition to eliminating debts, the filer may not be required to pay anything. However, there are instances in which assets may be sold to pay off debts. A Chapter 7 bankruptcy can wipe out nearly all unsecured debts and even some secured debts. Those who accumulated debts prior to a divorce, whose spouse is now deceased, or who suffered a medical condition resulting in a high debt burden can benefit greatly from Chapter 7.
Chapter 13 eligibility is relatively simple and does not require a means test. The process is initiated by completing the bankruptcy petition and filing it with the court, which is generally the second stage for Chapter 7 cases after passing the means test. Chapter 7 and Chapter 13 both require the conclusion of a credit counseling course. This course is required by the court in order to educate filers about money management, debt resolution options, and the prudent use of credit. Failure to complete the credit counseling requirement is one of the most common reasons why the court dismisses a person's case. In cases 7 and 13, debtors must also pay the required fees, which is another reason for dismissal.
Many people will assert that Chapter 13 is more advantageous than Chapter 7, but this is dependent on the filer's financial situation. In general, a Chapter 13 bankruptcy will result in less credit injury because the debts are repaid instead of discharged. It can also be advantageous for those who have jointly held debts or co-signed loans, both of which could unduly harm the credit of the co-debtor in a Chapter 7 case.
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