If you’re thinking about bankruptcy, you’ve probably already had a rough stretch. A layoff, a medical problem, a divorce. You’re not alone, and bankruptcy exists for exactly this reason. The two kinds most people consider are Chapter 7 and Chapter 13, and they work very differently.
Chapter 7: the fresh start
Chapter 7 is often called liquidation, but that word scares people more than it should. Most people who file Chapter 7 keep their house, their car, and their household belongings, because Maine’s exemptions protect them.
What Chapter 7 does is wipe out most unsecured debt, such as credit cards, medical bills, and personal loans. The whole process usually takes about four months from filing to discharge.
To qualify, you have to pass the means test. It compares your household income to the median income in Maine for a family your size. If you’re under it, you generally qualify. If you’re over, the test looks at your expenses to see whether you could realistically repay some of your debt.
Chapter 13: the repayment plan
Chapter 13 is for people who have regular income and want to keep property that might not be fully protected, or who need time to catch up on something.
You propose a plan to pay part of your debt over three to five years, based on what you can afford. At the end, much of the remaining unsecured debt is discharged.
Chapter 13 is often the right choice if:
- You’re behind on your mortgage and want to save your house from foreclosure
- You’re behind on car payments and need to stop a repossession
- Your income is too high for Chapter 7
- You have property worth more than Maine’s exemptions protect
What both chapters do
The moment you file under either chapter, the automatic stay begins. Collection calls stop. Wage garnishments stop. Foreclosure sales and repossessions are put on hold. For a lot of people, that relief is the first good night’s sleep they’ve had in months.
Both chapters also require a short credit counseling course before you file and a financial management course afterward.
What bankruptcy usually won’t erase
Some debts survive bankruptcy. These include child support and alimony, most student loans, most recent tax debts, and debts from fraud. If most of your debt is in these categories, bankruptcy may not help as much as you hope. We’ll tell you up front.
Which is right for you?
It comes down to your income, what you own, what kind of debt you have, and what you’re trying to protect. We’ll walk through all of that with you in a consultation, and we’ll tell you honestly if bankruptcy isn’t the best option. Sometimes negotiating with creditors gets you further.
After bankruptcy, there’s a path back. See Rebuilding Your Credit After Bankruptcy.
Call Gray & Palmer at (207) 945-5502 or visit our bankruptcy and debt page. Gray & Palmer is a debt relief agency. We help people file for relief under the Bankruptcy Code.
This article is general information about Maine law, not legal advice for your situation. Reading it doesn't create an attorney-client relationship. If you have a specific question, call us at (207) 945-5502.
