Bankruptcy & Creditors' Rights
When first considering bankruptcy as an option, many people start by questioning what their options are and if they qualify to file for bankruptcy at all. There are several major types of bankruptcy available under federal law, but chapter 7 and chapter 13 are the two most commonly used types. Bankruptcies filed under chapter 7 are referred to as "straight" bankruptcies or liquidations - this is the main type of bankruptcy utilized by individuals and small business owners. In chapter 7, most debts will essentially be eliminated or "erased" in a period of 4-6 months as opposed to a chapter 13 which requires a repayment plan that spans anywhere from 3 to 5 years.
Since chapter 7 is a shorter process and does not require repayment, the law sets limitations on who can qualify. You will have to complete a means test to see if you qualify for chapter 7. Generally, individuals or married couples who earn below their state's median income based on their household size and have high amounts of unsecured debt are good candidates for this type of bankruptcy. The U.S. Department of Justice provides useful means testing information that outlines the maximum income requirements for various household sizes. Those who earn above their state's median income may still qualify, but will have to complete several more steps in the means testing process to determine eligibility.
There is no debt maximum or ceiling when filing a chapter 7. There is a debt maximum when filing chapter 13 so there is a common misconception that there is also a limit for chapter 7 but that is simply not the case.
Those with business ownership or interests, should note that if more than half of your debt is business related then the means test does not apply and you automatically qualify. If less than half of your debt is business related (if it is a combination of personal and business debt) then you will have to apply the means test to see if you qualify.
Even though chapter 7 seems to be the easiest and shortest route to take, there are other factors to consider. For example, if you own a home or other property you wish to keep, chapter 7 will not allow you to do so and chapter 13 might be a better option. Many factors should be considered and it is advisable to seek legal advice from a qualified attorney during this process.
Upon filing for chapter 7 relief, you will receive a protection order called an automatic stay from the court that prevents those you owe, your creditors, from continuing collection efforts against you. The court will assign a trustee to oversee your case from start to finish. The court appointed trustee will act as the intermediary between your side (you, your attorney) and your creditors. The trustee will review and verify your financial statements and schedules to ensure their accuracy and question you under oath concerning your petition. You will have to place all of your nonexempt assets and property in the hands of the trustee to be liquidated (sold) and disbursed to creditors. You will not have to give up everything- there are exemptions that allow you to keep some personal property.
Federal law requires you to complete a credit counseling course before filing your petition, attend the "341 meeting" where you are questioned by the trustee, and complete a financial management course. The two courses can be completed in one day and are offered online, over the phone, and in person. See our Process Timeline for a glance at what to expect and when.
Once the process is completed, you will be granted a discharge of all pre-petition debts in order to provide a "fresh start". Certain debts such as student loans, child support, fraud and intentional tort claims, and certain tax debts cannot be discharged. For more detailed answers to any questions you may have, we have compiled an extensive list of Frequently Asked Questions to help you.
Jan and Ryan are happy to extend a free consultation to provide you with some insight on your unique situation. Feel free to use our contact form to the right and you will receive a prompt response.