The basics of Chapter 7 bankruptcy

June 14, 2013 (Press-News.org) The basics of Chapter 7 bankruptcy

Article provided by The Troglin Firm, P.C.
Visit us at http://www.troglinlawoffices.com

If you are considering filing for bankruptcy, you typically have two options under the Bankruptcy Code: Chapter 7 or Chapter 13. Both types of bankruptcy achieve similar ends such as a fresh financial start and protection from creditor harassment, garnishment proceedings and repossession. However, for many with little or no assets or income, Chapter 7 may be the better solution.

Basic differences

Chapter 13 bankruptcy, works by consolidating the debtor's debts into a repayment plan. Under the plan, the debtor makes monthly payments to repay the debts, completely or in part, over a three to five year period. At the end of the plan, many of the debtor's remaining debts are discharged, meaning that repayment is no longer required. This type of bankruptcy is ideal for those with a steady income that is sufficient to make the monthly payments during the plan's repayment period.

Conversely, Chapter 7 bankruptcy does not involve a repayment period and is a better fit for those with little or no income. In Chapter 7, a bankruptcy trustee liquidates (or sells) the debtor's non-exempt assets and applies the proceeds to his or her debts. Contrary to popular belief, this does not result in the debtor having little or nothing. Under the bankruptcy laws, important assets such as a primary residence, furnishings, clothing, vehicles and work tools are exempt and cannot be sold.

Once the sale of any non-exempt assets has been completed, the debtor receives a discharge of most debts that were not paid from the sale's proceeds. Chapter 7 bankruptcies, which can take as little as two or three months to complete, are significantly shorter than Chapter 13 bankruptcies.

Eligibility

Since Congress passed bankruptcy reform measures in the mid-2000s, Chapter 7 has been more difficult to qualify for than Chapter 13. Under the amended law, debtors must pass a means test before they may file for Chapter 7. Under the means test, if the debtor makes less than the median income in his or her state, he or she automatically qualifies. However, if the debtor makes more than the median, the court examines the debtor's disposable income to determine whether it is sufficient to repay at least part of the debt. If the income is sufficient to do this, the debtor must file for Chapter 13 instead.

A bankruptcy attorney can help

For those with little income who are struggling with debt, Chapter 7 can bring welcome relief. However, it cannot discharge every type of debt. Depending on your individual situation, there are important factors that may make another debt relief option better for you. To learn about Chapter 7 and all the other options available to you, contact an experienced bankruptcy attorney who can advise you on the option that would work for you.