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Bankruptcy Questions Answered: I Was Forced Into Chapter 13 Bankruptcy Due to Disposable Income––Should I Still File?

Forced Into Chapter 13 Bankruptcy Due to Disposable Income––Should I Still File?

There are several reasons why a person may decide to file for chapter 13 bankruptcy above any other type. Put simply, if you find yourself in what feels like insurmountable debt, but your income level and monthly disposable income disqualify you from filing for chapter 7 bankruptcy, then chapter 13 bankruptcy is generally your best option. 

Chapter 7 is reserved for folks who not only carry heavy debt, but are unable to pay on that debt because their monthly earnings don’t allow them to work on debt reduction while also caring for themselves and their family. On the other hand, if you have cash on hand at the end of every month after you’ve paid out for regular living expenses such as rent, groceries, and a vehicle, then you cannot file for a chapter 7 bankruptcy. Remember that secured debts on luxury items and payments on unsecured debts, like credit cards, cannot be deducted from your monthly income. So the money used to maintain these technically counts as disposable income in the court’s eyes.

Put simply, disposable income is how much income you have left over at the end of every month after deducting your regular living expenses. Charitable contributions up to 15% of your gross income can also be deducted. Here are some additional examples of potential deductions:

  • food and clothing
  • housing and utilities
  • transportation costs
  • taxes
  • involuntary payroll deductions
  • life insurance
  • court-ordered payments
  • certain education costs
  • childcare expenses
  • health care costs

Clients will often look to file a chapter 7 bankruptcy as a “fresh start,” hoping to discharge debt free and clear and move forward. But this isn’t always possible, and after a thorough review of their budget and finances, that will come clear. Working with an experienced bankruptcy attorney will help you to more accurately determine how the court evaluates your monthly financial situation.

Why Chapter 13 Bankruptcy Is Worth It

When clients realize that they cannot file for chapter 7 bankruptcy and instead need to repay all their debts by way of a three or five year plan, they could begin to question if there’s any sense in filing at all. As seasoned Ohio bankruptcy lawyers, we assure clients that yes, there is most definitely value in filing for a chapter 13 bankruptcy. 

Here’s one big reason why: so long as you are paying all of your disposable income toward your debts, interest doesn't accrue during the repayment period. That fact alone could save you a sizable amount of cash in the long run. Another factor to consider: you might not end up owing 100% of your debts after all. If during your bankruptcy proceedings a creditor has been notified of the bankruptcy but never submitted a proof of claim form, then upon completion of your repayment plan you are automatically discharged from that debt. And because repayment is based on what you can afford and not on what a creditor dictates, it’s possible that your level of disposable income might mean that you aren’t repaying 100% of your debt.

Sometimes we hear clients express that they don’t want to be caught up in repayment for five years. We always encourage them to consider that this just means that they could end up in debt much longer than that, since they cannot discharge their debt under a chapter 7 filing. Yes, it might be frustrating or inconvenient to be under a repayment plan for five years, but think instead of the freedom that comes afterward, once debts are gone and you can start fresh. And in the grand scheme of things, five years isn’t all that long anyway.

So if disposable income has forced you into resolving your debts through a chapter 13 bankruptcy, that’s only because it is more than likely your only and best option available. This is especially true if you are staring down at least $30,000 in debt. After three or five years–generally five if your average 6-month income is over the median for your region–you can walk away. Short of having a wealthy and generous family member to help you get back on your feet, there is no better way to put debt behind you.

Chapter 13 Bankruptcy or Debt Consolidation?

Once clients realize that they cannot file for chapter 7 bankruptcy and that they will in fact have to repay debts, they often ask, "How is this different from debt consolidation?” It’s a valid question, and there are definite differences. In debt consolidation you are often paying off 100% of your debts, with interest, based on what creditors want you to pay. On top of that, debt consolidation will also probably last more than five years, up to an unknown duration. Clearly, there are at least four good reasons right there to opt instead for a chapter 13 bankruptcy filing. 

Your Bankruptcy Questions Answered, By An Experienced Bankruptcy Attorney

When you’re in serious debt and still have disposable income available but you’re starting to find it hard to manage, you could easily feel overwhelmed. Without knowing all the ins and outs and best practices, you could end up thinking that filing for bankruptcy couldn’t help your situation. But you could be surprised what you’ll learn when working with a seasoned Ohio bankruptcy lawyer. Rest assured–you have an advocate in us. 

If you need advice on whether a chapter 13 bankruptcy is right for you, don’t hesitate to get in touch with us at Bates and Hausen, LLC. Draw on the collective expertise and skills of John R. Bates and James F. Hausen. Together they have provided over 50 years of legal counsel and proudly serve the Akron, Canton, Wooster, Dover, and New Philadelphia areas. Contact Northeast Ohio Bankruptcy Attorneys to set up a free consultation, learn more about your bankruptcy options, and take the first step toward getting out from under your debt.

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