A chapter 7 is a liquidation and a chapter 13 is a reorganization. A chapter 7 will discharge most debts expect domestic obligations, student loans, and recent tax debts. To qualify for a chapter 7, a debtor must pass the ‘means test.’ The means test is an income criterion. The person’s income and household size are compared with the IRS local standards. If the income is too high, the debtor must complete the long form of the means test to determine the amount of disposable income (income minus expenses). If the amount of disposable income is too high, the person may want to file under chapter 13.
In many cases good bankruptcy counsel can help clients avoid common pitfalls. For example, some people who are considering filing for bankruptcy do not want to include relatives or friends so they pay back their friends and/or family without paying other debts. This is considered preferential treatment and will create problems if the person files bankruptcy within 2 years of the transfer. Individuals often believe that they can protect assets from their bankruptcy by transferring the assets to friends or family without charging fair market value. Before you transfer any assets like this, you should contact an attorney.