- Understand the types of personal bankruptcy available.
- Consult with an experienced attorney when considering bankruptcy.
- Choose bankruptcy as an option of last resort.
Advice to Help You Avoid Bankruptcy
Bankruptcy is a complicated and public legal process. Types of personal bankruptcy include Chapter 7 and Chapter 13. Both are options for consumers seeking to get debt relief. Unfortunately, after the passage of the Bankruptcy Reform Act in 2005, it became harder to qualify for a liquidation bankruptcy, and there is now more complexity to an already intimidating process.
Chapter 7: Liquidation
When you hear the word “bankruptcy,” you are most likely to think of a Chapter 7 bankruptcy. This type of bankruptcy is also entitled Liquidation, as it contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Basically, this means a court appointed trustee sells everything they can use to pay off your creditors, except what is exempt.
Sometimes, there is little or no nonexempt property in a Chapter 7 bankruptcy case, so there may not be an actual liquidation of the debtor’s assets. These cases are called no-asset bankruptcy cases.
A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge several months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under Chapter 7.
Under the new bankruptcy means test, if a debtor's income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7 relief, and instead be forced to file for a Chapter 13 bankruptcy.
Chapter 13: Adjustment of Debts of an Individual With Regular Income
The formal title of a Chapter 13 bankruptcy, Adjustment of Debts of an Individual With Regular Income, pretty much states in a nutshell what the scheme behind Chapter 13 is all about.
Chapter 13 bankruptcy is designed for an individual debtor who has a regular source of income, whether it be from a job or social security benefits. Chapter 13 is often preferable to Chapter 7 because it enables the debtor to keep a valuable asset, such as a house when, for example, the equity exceeds the limits under the home state’s homestead exemption. A Chapter 13 bankruptcy also allows the debtor to propose a “plan” to repay creditors over time-usually five years. Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test, which went into place in 2005 with the Bankruptcy Reform Act.
At a Chapter 13 confirmation hearing, required as the basis for the order approving the plan and ordering the creditors to accept it (the hearing is called a section 341 hearing, or simply, “the three forty-one”), the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors based on the debtor’s anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while he plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.
Although it is now more difficult to qualify for a Chapter 7 and more people are required to enter into repayment plans, bankruptcy is still available to most people in need of its protection. Several types of bankruptcy are available, depending on your assets, income, and financial situation. Let Bills.com point you in the right direction, first to evaluate what your debt resolution options are, and whether you can avoid bankruptcy, and then to see if you can qualify for bankruptcy and what form is best suited for your needs. You will learn about the different types, the recent changes to the law, and which debts can and cannot be discharged. If you are ready to file, review our instructions on filing bankruptcy.
Be aware though, bankruptcy should be a last resort and will damage your credit score for up to 10 years. Be sure to also investigate if consolidating debts is an option that will help you avoid bankruptcy. Look at each bankruptcy alternative, so you can find the best way to solve your debt problems and protect your financial future. Review the Bills.com debt consolidation guide to see if this is an option for you. Lastly, seek counsel from an attorney with bankruptcy experience.