Chapter 7 Bankruptcy

Chapter 7 Bankruptcy Man's DebtBankruptcy has come a long way since debtor’s prison and death were the sentences for those unable to pay their debts. England’s original bankruptcy laws very much favored the creditor, and offered little or no hope to the debtor. Over time, a more equitable form of bankruptcy found its way into English law and was used as the starting point for US Bankruptcy law. The Bankruptcy Act of 1978 is the basis for the law as it currently stands, offering a fresh start for those who really need it.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcies are designed to liquidate the debtor’s assets. All property, except that which a petitioner is allowed to keep, is turned over to a bankruptcy trustee who disburses the debtor’s funds to creditors in an effort to repay part of the debts that are owed. Approximately 700,000 Americans filed for Chapter 7 bankruptcy in 2013. Chapter 7 bankruptcy accounts for more than double the number of Chapter 13 bankruptcies filed each year.

Because all allowable debts are discharged, many individuals choose to file Chapter 7 when it appears unlikely they will be able to pay off their debts. However, they are not exempt from student loan debt, alimony, child support, IRS debt, and fines. Petitioners of Chapter 7 bankruptcy cannot file again for at least six years.

Qualifying for Chapter 7 Bankruptcy

To qualify for relief under Chapter 7 of the Bankruptcy Code, you must also pass a means test. First calculate your average income for the past six months. This is done by adding your gross income for each of six months together and dividing by six. Even though it is a six month average, it is called your current monthly income. If your current monthly income is below the median for your state, you qualify for Chapter 7 bankruptcy.

If your current monthly income is greater than the median income for your state, further review is required to determine whether or not you have sufficient monthly income to repay your debts. In this case, reasonable expenses for necessities like housing, transportation and food are deducted from your monthly income. The amounts are based on the cost of living in your state. If you have little money left over after these expenses are paid, you may qualify for Chapter 7.  If you are determined to have enough income to pay off a portion of your debts, you can file Chapter 13 bankruptcy. If you are uncertain about whether you qualify, work with a bankruptcy attorney to determine your eligibility for a Chapter 7 bankruptcy.

An individual cannot file under Chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

In addition, no individual may be a debtor under Chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an agency approved by the EOUST, like InCharge Debt Solutions.

When Will My Debts be Discharged?

Debts are usually discharged within 4 months of filing a Chapter 7 bankruptcy. Note that the court may not grant a discharge if the consumer does not complete Pre-Discharge Debtor Education.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. Although an individual Chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

You’ll want to rebuild credit after bankruptcy discharge.


Sources:

NA, Bankruptcy Statistics (2013) US Courts. via: http://www.uscourts.gov/statistics-reports/caseload-statistics-data-tables

NA, United States Department of Justice (2013). via: http://www.justice.gov/ust/means-testing