Bankruptcy Basics for Individuals

For those facing debt that they are unable to repay, bankruptcy can provide a fresh start.

The first step is to determine whether an individual is eligible for bankruptcy.  Eligibility under Chapter 7 involves passing the “means test” which is based upon the individual’s average monthly income, family size, and some other factors.  As is the case in many parts of the legal system, there are general rules, exceptions, and exceptions-to-the-exceptions that apply to bankruptcy eligibility.  In cases where an individual does not initially appear to qualify for bankruptcy, the special circumstances of that individual can be explained so as to help that individual qualify.  Generally speaking, people whose financial situation is such that they are considering bankruptcy are often eligible.

Assuming that an individual does qualify for bankruptcy, it is also important to determine whether it is in that individual’s best interest to proceed with bankruptcy.  While bankruptcy certainly has a negative impact upon a person’s credit score, the benefits of bankruptcy and getting a fresh start can often outweigh the negatives.  Discussing the pros and cons of proceeding with bankruptcy is part of the bankruptcy consultation process.

Chapter 7 bankruptcy involves a discharge of debt, meaning that the person is no longer liable for the debt that is discharged.  Property that is non-exempt is surrendered and used to repay creditors in part.  In terms of a time frame for completion, Chapter 7 bankruptcy often takes about six months to complete once the necessary paperwork is prepared.  Properly preparing the paperwork is of vital importance since debt that is properly listed cannot be discharged.  An “automatic stay” is created when filing, which prevents creditors from garnishing wages, levying upon bank account, or taking other collection action.  Often, those filing for Chapter 7 bankruptcy are able to keep their house and car. Nation-wide, over 2/3 of the bankruptcy filings are Chapter 7.

Chapter 13 bankruptcy involves the creation of a repayment plan for debt.  Income is used to make payment towards the restructured debt, and repayment plans generally last three to five years.  Individuals filing for Chapter 13 bankruptcy generally keep their property.  Some types of debt (called “priority debts”) are given (as the name suggests) priority over other debts and must be paid in full.  Creditors who have a security interest in property, such as the bank that provided the mortgage for a house or that has a security interest in a car, will continue to receive regular payments and repayment of any past-due amounts.  Repayment of other debts, to the extent possible, is made from disposable income, meaning that these other debts are not necessarily paid in full or even paid at all.

In general, some debts, such as child support, alimony (spousal support), debts from crimes, and student loans, cannot usually be discharged in bankruptcy.  However, the presence of these debts may have an impact upon the bankruptcy process overall, so it is important to mention those debts to your bankruptcy attorney.

Prior to filing for bankruptcy, individuals must obtain credit counseling from an approved agency.  This credit counseling is a rather simple process and can be completed online.  Because of requirements concerning when the counseling takes place in relation to the bankruptcy filing, it is wise to consult with a bankruptcy attorney prior to obtaining the counseling.

For individuals who have previously filed for bankruptcy, there are time-based restrictions upon filing again (often 6 or 8 years must pass between bankruptcy filings).

Members of the military have additional rights under the Servicemembers Civil Relief Act.  These rights limit the ability of creditors to take civil actions regarding debts, provide for forbearance, reduction of interest, etc.  Disabled servicemembers are also exempt from the Chapter 7 means test under certain circumstances.

At Puryear Law, we handle bankruptcy and many other types of cases. We are a Debt Relief Agency. We help people file for bankruptcy relief.