Chapter 7 Bankruptcy
Chapter 7 bankruptcy is sometimes called "liquidation" bankruptcy because it cancels your debts in exchange for allowing the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors. Chap 7 BK provides debt relief because unsecured debts are generally forgiven (discharged), which is why many people consider this form of bankruptcy a "fresh start". But, it impairs credit for 7 to 10 years and generates a public record about you. Bankruptcy protects consumers against lawsuits from creditors, but the extent of protection isn't as much under the new bankruptcy laws. Other changes have been made, as well, that affect anyone filing for bankruptcy.
For example, under the old laws, you could choose which chapter under which you wanted to file. Now, you must qualify to file under Chapter 7. Before filing, you must first measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. If it is more than the median, you must pass the means test, which determines if you have enough disposable monthly income (DMI), after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan. If the income that's left over is less than $100, you can still file under Chapter 7. Otherwise, you'll have to file under Chapter 13.
Another change is that you now have to undergo mandatory credit counseling with an agency approved by the United States Trustee's office before filing for bankruptcy, whether or not a repayment plan is feasible. To find an approved agency in your area, go to the Trustee's website, and click "Credit Counseling and Debtor Education". When you file, you must submit proof that you underwent the counseling along with the agency's repayment plan proposal, if applicable, your bankruptcy petition and the paperwork that outlines your assets and liabilities and list of creditors (complete with account numbers and addresses of your creditors).
Until your case is filed, you are not afforded any protection under bankruptcy law. So, creditors can still pursue collection actions, garnish your wages, proceed with foreclosures, evict you, etc. It's best for you to get this requirement done quickly and file your bankruptcy quickly, so you can be protected under bankruptcy laws. However, you don't get as much protection under the new laws as you did under the old ones. Ask your attorney about the changes in the law that affect you.
Towards the end of your case, you'll also have to attend a second mandatory session teaching you how to manage your personal finances. You'll be under bankruptcy protection, at this point.
There is more paperwork involved with filing, and your attorney is now required to conduct an investigation of your filing because he/she can be held personally liable for inaccuracies. Bankruptcy is also more expensive because you have to pay for both counseling sessions in addition to paying the filing fee (around $299) and your attorney fees, which is probably higher due to the increased risk to the attorney under the new laws.
Chapter 7 bankruptcy is most beneficial for those with more unsecured debt than secured debts. Such debts as child support, taxes and any federal student loans cannot be discharged in a bankruptcy proceedings. If you have any secured debts, you should re-affirm these debts and continue paying on them to keep from losing your collateral (e.g., your automobile, etc.) Some property is exempt from being taken in a bankruptcy proceeding. Every state has exemption laws, which dictate what types of property (or, in some cases, how much equity in particular types of property) you are entitled to keep if you file for Chapter 7 bankruptcy. Check with your attorney on the details. |
