New Changes to the Bankruptcy Code What Type of Bankruptcy Should I File? What is Chapter 7 Bankruptcy? What is Chapter 11 Bankruptcy? What is Chapter 13 Bankruptcy? How to File for Chapter 7 Bankruptcy How to find a Bankruptcy Lawyer Bankruptcy Fraud When Bankruptcy is the Only Choice

What is Chapter 7 Bankruptcy?

If you find yourself in financial distress and see no way out of the debt you’ve incurred, bankruptcy may be an option for you to consider (see Should I File Bankruptcy?). Bankruptcy is a way for you to discharge your debts and start over. There are three different ways for you to pursue bankruptcy: Chapter 7, Chapter 11 and Chapter 13 (see What is Chapter 11 Bankruptcy? and What is Chapter 13 Bankruptcy?). Since bankruptcy laws are complex, you should always consult a bankruptcy attorney to help you determine which method is best for your circumstances.

Chapter 7 bankruptcy is one method that involves a liquidation of an individual’s assets to pay back his or her creditors. While you may retain exempt property, Chapter 7 bankruptcy may result in a loss of non-exempt property. Each state has its own laws that determine what is exempt property and what is non-exempt; therefore, it is a good idea to consult a bankruptcy attorney in your state to help you understand which assets you may retain and which assets you may lose as a result of filing a Chapter 7 bankruptcy.

The Means Test of Chapter 7 Bankruptcy

To file for Chapter 7 bankruptcy, you must be able to pass a means test. The means test is a tool to determine if you do not have the financial means to pay back your debt. To determine this, the means test compares your income to the median income of a family the size of yours in your state. If your income is less than the median income for a family your size in your state, you are eligible for Chapter 7 bankruptcy.

If your income is higher than the median, you must pass a second step of the means test. The second step of the means test calculates your disposable income over the next five years. Allowable expenses as defined by the IRS are subtracted from your annual income to determine how much money you have left over after you pay for essential living expenses; this is your disposable income. If your disposable income is less than $6,000 over the next five years, you are eligible to file a Chapter 7 bankruptcy.

If your disposable income is between $6,000 and $10,000, you are not eligible to file for Chapter 7 bankruptcy unless it is determined that you will not be able to offer your creditors a significant repayment. This is determined by comparing your disposable income over the next five years to a percentage of your unsecured debt. If it is determined that your disposable income over the next five years will be less than 25% of unsecured debt, you are eligible to file for Chapter 7 bankruptcy.

Calculating your means is complicated and varies from state to state. It is, therefore, very important to contact a bankruptcy attorney in your state to see if you are eligible to file for Chapter 7 bankruptcy. If you are not eligible, for Chapter 7, you may still be able to file under Chapter 11 (see What is Chapter 11 Bankruptcy?) or Chapter 13 (see What is Chapter 13 Bankruptcy?). A bankruptcy attorney should be able to help you determine what type of bankruptcy you are eligible for.

Credit Counseling for Chapter 7 Bankruptcy

In addition to passing the means test, an individual must receive credit counseling from an approved credit counseling agency within 180 days before filing for Chapter 7 bankruptcy. When you see a credit counseling agency, they will brief you on alternatives to bankruptcy, teach you about financial management, and show you how to complete a budget analysis. These agencies may be found online or through a referral from your bankruptcy attorney. If you do not complete credit counseling from an approved agency within 180 days before filing for Chapter 7, your case will be dismissed.

Dischargeable Debt under Chapter 7 Bankruptcy

It is important to be aware that not all debt will be discharged under Chapter 7 bankruptcy. Only unsecured debt may be discharged. Unsecured debt is defined as credit extended to an individual based on his or her ability to pay. Secured debt, on the other hand, is credit extended to an individual based on not only his or her ability to pay, but on the creditor’s right to seize any item or property used as collateral upon default of the loan.

In addition to secured debt, other debts that may not be discharged under Chapter 7 bankruptcy are child support, alimony, certain taxes, federal education loans, and criminal restitution orders, in addition to others. It is important to understand what debt you will retain and what debt you will be absolved of when you are filing for bankruptcy. Since these determinations vary by state, it is essential to discuss your circumstances with an experienced bankruptcy attorney from your state. An attorney should be able to tell you what debt you will still be responsible for under a Chapter 7 bankruptcy.

Filing for bankruptcy is a complicated process that demands the attention of an expert (see How to File for Chapter 7 Bankruptcy). Bankruptcy laws are complex and vary from state to state. Contacting a bankruptcy attorney sooner than later should help you determine what type of bankruptcy to file if, in fact, you decide that bankruptcy is your best option.