You’ve done your best to repay creditors, but now there is not enough money to go around.  Interest rates have skyrocketed, minimum payments have tripled, and you’ve fallen behind on several accounts.  If you need to protect your house, your car, and stop all collection activity, will filing bankruptcy help?

If bankruptcy is the solution, will you be filing a Chapter 7 or a Chapter 13 case?

To understand the differences between these two options, let me try to paint a picture.  Imagine standing outside the US Bankruptcy Court with all of your bills in hand.  As your stare at the building, you notice there are only two doors to gain entrance; one door is very narrow while the second door is very wide.  Its easy to see that one door is designed to keep people out and the other seems to let everyone in.  Which door should you try to enter?

Well, the narrow doorway is like a Chapter 7 bankruptcy.  People who earn too much income will not be able to enter and cannot file a Chapter 7 case.  Only those whose gross household income (during the prior 6 months) falls below the median income (of other similar households) are permitted to file a Chapter 7 bankruptcy.  A Chapter 7 bankruptcy takes 90-100 days, costs less money than a Chapter 13, and allows you to discharge most debts.  Even though the doorway appears narrow, about 92% of bankruptcy filers in Rhode Island qualify and are able to enter for debt relief.

To understand a Chapter 7 case better, lets consider the following example.  The median 6-month income for a Rhode Island 4-person household is presently $ 43,501 gross (0r $ 87,002 annually).  If your 4-person household gross income in the past 6 months (not including Social Security income, or unemployment benefits) is lower than $ 43,501, you can enter the narrow doorway of a Chapter 7 bankruptcy.  Just remember that you cannot enter the Chapter 7 doorway twice within in eight year period and time is measured from the date of your prior filing.

So what is the other doorway and why is it so wide?  The second door leads to a Chapter 13 filing and is wide because bankruptcy law encourages the repayment of debt where there is ability.  A Chapter 13 petition is, essentially, a 5 year repayment plan and is for those who either earn too much income, or are trying to protect property that could be lost in a Chapter 7 case.  In Rhode Island, less than 10% of all bankruptcy cases are of the Chapter 13 variety.

I hope you now understand your choices a little better.  It really comes down to your household income and your ability, or inability, to repay unsecured creditors.  While its possible to file a Chapter 7 bankruptcy if your income is higher than the median income, I would need to perform an analysis and ask you a number of questions to see if you qualify for immediate debt relief.  If you show me your pay-stubs for the prior 6 months, I can let you know your options.  We can also develop a plan for filing down the road if your income is only temporarily high.