Bankruptcy filers often are confused regarding which bankruptcy chapter is the best. While chapter 7 offers to get rid of all possible debts without paying for anything, other options are available. Businesses (sole proprietorship, corporations, or partnerships) who wish to stay operational and avoid liquidation can file under bankruptcy Chapter 11. Sole proprietors also have the option of filing under chapter 13 bankruptcy. Chapter 13 bankruptcy allows individuals and sole proprietors to protect their property from foreclosure by catching up on past due payments through the repayment plan. You can also keep any non-exempt property if you can pay an equivalent amount to your unsecured creditors.
Eligibility for Chapter 7 bankruptcy
Chapter 7 bankruptcy is also known as liquidation bankruptcy. The non-exempt property is liquidated by the bankruptcy trustee to pay the unsecured creditors. The unsecured nonpriority debts are discharged at the end of this chapter. Since individuals usually do not have to pay anything, people prefer to file for Chapter 7 bankruptcy. However, not everybody can satisfy the eligibility criteria. To be eligible for Chapter 7 bankruptcy, the average household income for the past 6 months should be less than the state median for a household of the same strength. If the current monthly income is more than the state median, a Means Test is used to find out whether the individual can file under Chapter 7 or not. In the Means Test, it is checked whether the filer’s disposable income is sufficient to support the repayment plan or not.
When is filing for Chapter 7 bankruptcy not possible?
If the debtor’s current monthly income is more than the state median, Means Test is used to determine if Chapter 7 filing is abusive. This is usually the case if the aggregate current monthly income over the past 5 years is more than $12,850 or 25% of the non-priority unsecured debt with a debt amount of $7,700. If the individual had previously filed a bankruptcy petition which was dismissed 180 days due to willful failure to comply with court orders, they cannot file for any chapter of bankruptcy. Additionally, individual debtors cannot file under Chapter 7 or any other bankruptcy chapter unless they have undertaken and received credit counseling from an approved credit counseling agency within 180 days before filing.
What does bankruptcy involve?
Bankruptcy helps individuals get a fresh financial start by removing their liabilities for the discharged debts. The individual needs to file a petition with the bankruptcy court along with a list of their assets and liabilities, current income and expenditure, financial records, a copy of tax returns, any contracts, and unexpired leases. They also need to file their credit counseling certificate. Along with these documents, the filer needs to pay $245 as the case filing fee, $75 as miscellaneous administrative fee, and $15 as trustee surcharge. If paying the entire fee is not possible for the filer, they can pay it in installments after seeking the court’s permission. If the individual’s income is less than 150% of the poverty level and cannot pay the bankruptcy filing fees, the court can waive this requirement.
The debtor should provide a list of their creditors and the type of their claims, a list of their property, a detailed list of the monthly living expenses, and the source, amount, and frequency of their income. Individuals can protect some of their property from creditors through federal or state bankruptcy exemptions. Filing for bankruptcy puts an ‘automatic stay’ in place, which stops all collection actions. The bankruptcy trustee is responsible for liquidating the non-exempt property and distributing the money among the creditors. Usually, in the case of Chapter 7 bankruptcy, a discharge is granted within 3 to 6 months of petition filing. The discharge absolves the debtors from any personal liability for most debts. It prevents creditors from pursuing you for those debts.