John Anastasio is a lawyer in Stuart, Florida. In practice since 1981, Anastasio runs the Law Offices Of John Anastasio. He is a graduate of Seton Hall University, New York University, and Seton Hall University School of Law. In this article, he details the financial advantages to filing for personal bankruptcy.
Bankruptcy gives people a fresh start. That is the No. 1 advantage it gives consumers. On top of that, I believe that filing for bankruptcy can also give some people a sense of personal closure on that chapter of their lives. But, people should understand that bankruptcy is only an option if they qualify and not everyone qualifies anymore.
Since 2005, the government has drastically changed the rules on how someone can file for bankruptcy. One of the differences it that you are now required to go through what is called a “means test.” That is, after going through a 10-page form, called a B22 form, and undergoing the means testing, it will be determined whether your income is above or below the median income for a family of your size.
This determination is made after looking at a history of your last six month’s salary. And obviously, the size of your family and the number of children you have will influence how much you can make and still qualify to file for bankruptcy. Anyone curious where they would fall in this spectrum can get those figures from the federal government, which publishes them annually.
If the means test determines that you are at or below the median income for a family of your size, then your best option is to do what is called a liquidation or straight bankruptcy. This is what people normally think of as a typical bankruptcy. You lose all of your debt and you lose property that is not protected by law, which would be exempt. This is by far the most popular of the options.
If your income is above the median levels, then you are going to be forced into what is called a Chapter 13 debt reorganization. This will force you to pay back all of your secured creditors and pay back as much of your unsecured debt over a 60-month period as you have in available disposable income.
To better understand what exactly counts as disposable income, we can use an example. Let’s assume you’re making $2,000 a month. If it costs you $1,500 a month to live between your food, your car, and your rent, than that means you have $500 a month in disposable income left over. So that is $500 a month that you will have to pay into the bankruptcy plan to repay your credits. Further, if you are behind in your mortgage, then you may be able to cure you debt in that way, too.
As you can tell, this plan can be difficult. Filing for Chapter 13 means that you are going to be using up all your disposable money over a period of three to five years, so you have got to think about the pain involved in that. You have also got to think about the fact that 85% of these Chapter 13 plans fail, and you could get stuck with the same problems without being able to file again for a number of years. So you can get yourself in a real jam with a Chapter 13 bankruptcy—that is a definite downside.
Now, if you have over $325,000 in secured debt—and you may have actually wracked up that much with some of these larger home loans—then you can’t even use a Chapter 13 bankruptcy anyone. It’s just not an option. Instead, you have got to file for a small business Chapter 11 bankruptcy, which gets to be pricey. In the end, you could spend thousands of dollars trying to file for a Chapter 11 bankruptcy. So that is a big problem and a major issue to consider when you have got such a massive amount of debt.
Ideally, if you are a consumer who is going to file for bankruptcy, then you would want to do a Chapter 7. Using a Chapter 7 bankruptcy, you can just blow out all the debt at once. You may have to bite the bullet on certain aspects, but at least you are free and clear financially—and certainly able to start fresh in the future.
