If your unsecured or secured debts are over the limit for Chapter 13 bankruptcy, your application with the court will be denied. Even if this form of bankruptcy is not an immediate possibility, there are still ways you may lower your overall debt and protect your assets. It's important to be proactive in this process to avoid continuing collection practices and possible litigation from your creditors.
Chapter 7 Bankruptcy
As of March 2011, the unsecured debt limit for Chapter 13 bankruptcy in the United States is $360,475. The secured debt limit for Chapter 13 bankruptcy is $1,081,400. If your unsecured debt exceeds the limit for Chapter 13 bankruptcy, you may be able to pass a means test to file for Chapter 7 bankruptcy liquidation. In order to pass the required means test, your income must fall below your state's median income level after deductions for living expenses including your rental payments or home mortgage. The court views your income for the six-month period prior to your filing for Chapter 7 bankruptcy protection to determine an average for your income. Once this average is established, your living expenses are deducted and the resulting figure is compared to your state's median income level.
Debt Management Plans
If you cannot file for Chapter 7 or Chapter 13 bankruptcy, you may explore retaining the services of a debt management company. A non-profit debt management firm can negotiate with your creditors for lower monthly payments, lower interest rates and work to eliminate late fees and service charges on your accounts. Debt management works by the company creating a fixed payment plan for you where you make one monthly debt management payment and the company distributes these funds to your creditors. It's important you hire a non-profit debt management company to avoid the excessive fees charged by a for-profit debt management business. This type of service is also geared towards unsecured debts like credit cards and medical bills. Secured debts including home loans and student loans are usually not eligible for debt management.
Debt Settlement
A debt settlement is an offer extended from you or your creditor to payoff your debt for an amount of money, which is typically less than you owe. Settling some of your debts in this way can provide you with a substantial savings as opposed paying off the entire amounts owed. This debt settlement strategy can lower your overall debt, which may make you eligible for Chapter 13 bankruptcy if you choose to reapply. The downside of debt settlement occurs at tax time. You are required to declare any portion of debt forgiven over $600 as income on your federal return.
Selling Assets
If your Chapter 13 bankruptcy was intended to save your business or home from foreclosure or closing, you may have no alternative other than to sell these assets to pay off your creditors. A short sale of your home, if approved by your mortgage lender, can help you avoid foreclosure and limit the damage to your credit rating. Selling your business assets and equipment may generate sufficient funds to pay off some of your creditors and may help you lower your overall income to pave the way for a Chapter 7 bankruptcy filing.
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