A Basic Guide to Consumer Bankruptcy Part I

Bankruptcy can feel overwhelming, but it provides many individuals a path toward financial relief and a fresh start. This two-part series offers a clear overview of consumer bankruptcy, focusing first on Chapter 7 bankruptcy, one of the most common types filed by individuals.

What Is Bankruptcy in Arkansas?

Bankruptcy is a federal court process that allows consumers and businesses to either eliminate or repay debts under court supervision. While every case is unique, the most common reasons individuals file for bankruptcy include:

• Unexpected medical expenses
• Overwhelming credit card debt
• Major life events such as job loss or divorce

The United States Bankruptcy Code, found in Title 11 of the U.S. Code, governs all bankruptcy filings. For consumers, the two primary options are Chapter 7 and Chapter 13. Each of these chapters comes with different rules, obligations, and procedures. Determining which chapter you qualify for is one of the first and most essential steps in the bankruptcy process.

Who Qualifies for Chapter 7 Bankruptcy in Arkansas?

Not everyone is eligible to file under Chapter 7. To qualify, you must pass a “means test,” which measures your income and ability to repay debts. This ensures Chapter 7 is reserved for individuals who truly cannot afford repayment under Chapter 13.

The Chapter 7 Means Test

If your monthly income is below your state’s median income, you may qualify for Chapter 7. However, if you earn above the median, the court will review your financial records to see whether you have enough disposable income to pay creditors through a Chapter 13 repayment plan.

The means test considers factors like your household size, living expenses, and secured debt obligations (such as a mortgage or car loan). Even if your income exceeds the median, you may still qualify if your disposable income is low enough.

How Chapter 7 Bankruptcy Works for Arkansas Consumers

Chapter 7 is often called liquidation bankruptcy because it involves selling certain assets to pay creditors. Here’s what happens in most cases:

• A court-appointed trustee gathers and sells the debtor’s nonexempt assets.
• The proceeds are distributed to creditors based on priority under the Bankruptcy Code.
• Some property, such as a modest vehicle, household items, or retirement accounts, may be considered exempt and protected.
• Secured creditors may still claim assets subject to mortgages or liens (like a financed car or house).

For many debtors, most or all property is exempt, meaning they can keep essential belongings while still eliminating debt. However, it’s important to carefully consider the potential loss of property before filing.

Steps in the Chapter 7 Bankruptcy Process:

Filing Chapter 7 involves several vital steps that unfold under the supervision of the court:

Credit Counseling

Before filing, debtors must complete a credit counseling course through a court-approved agency. This ensures you fully understand your options. In some cases, the counselor may recommend alternatives, such as debt settlement or repayment plans, if bankruptcy isn’t necessary.

Filing the Chapter 7 Bankruptcy Petition

A Chapter 7 case begins when the debtor files a petition with the bankruptcy court. Along with the petition, you must submit schedules detailing income, expenses, assets, debts, and a statement of financial affairs. These documents must be complete and accurate, as any errors could delay or jeopardize your case.

The Automatic Stay in Chapter 7

Once the petition is filed, the automatic stay immediately takes effect. This powerful legal protection halts most collection activities, including wage garnishments, foreclosure proceedings, repossessions, and creditor phone calls. It provides much-needed breathing room while the bankruptcy process moves forward.

Meeting of Creditors (341 Meeting)

Within a few weeks of filing, you’ll attend a Meeting of the Creditors, also known as a 341 Meeting. During this session, the trustee will ask questions about your finances, debts, and assets while you are under oath. Creditors may also attend and ask questions, though many choose not to.

Discharge of Debts in Arkansas Chapter 7 Cases

If there are no objections and you’ve complied with all requirements, the court will issue a discharge order. This wipes out most unsecured debts, giving you the financial “fresh start” that is the primary goal of Chapter 7. The discharge typically comes within three to six months of filing.

What Debts Can Be Discharged?

A Chapter 7 discharge eliminates many unsecured debts, such as:

• Credit card balances
• Medical bills
• Personal loans
• Certain utility bills

However, not all debts are dischargeable. Examples of non-dischargeable debts include:

• Child support and alimony
• Certain tax obligations
• Court fines and restitution
• Most student loans
• Debts from fraud or malicious conduct

Understanding which debts remain after bankruptcy is an essential part of planning and can help you avoid surprises later.

Should You File Chapter 7 Bankruptcy Without an Attorney?

Technically, individuals have the right to file bankruptcy without an attorney. However, the process is highly complex. Filing the wrong documents, miscalculating exemptions, or missing deadlines could result in losing property, having your case dismissed, or being denied a discharge. An experienced bankruptcy attorney ensures your case is filed correctly and protects your rights at every step.

How a Bankruptcy Lawyer Can Help You File Chapter 7 in Arkansas

Filing for Chapter 7 bankruptcy can be overwhelming, especially if you’re worried about losing property or making mistakes in the paperwork. A skilled bankruptcy attorney provides guidance and protection at every stage of the process.

Here’s how an attorney can help:

Eligibility Assessment

A bankruptcy lawyer can carefully review your income, expenses, and debts to see if you qualify for Chapter 7. They’ll apply the means test correctly and explain whether Chapter 7 or another option, like Chapter 13, is in your best interest. This ensures you choose the path that provides the most relief.

Asset Protection

Attorneys know how federal and state exemption laws apply to your situation and can help you safeguard important property like your home, car, or retirement savings. By strategically applying exemptions, they can minimize the risk of losing valuable assets. This guidance gives you peace of mind during a stressful process.

Accurate Filing

Bankruptcy requires extensive paperwork, including detailed schedules and financial statements. A lawyer ensures these documents are complete, accurate, and filed within court deadlines. This reduces the chance of delays, dismissal, or complications in your case.

Representation at Hearings

Your attorney will stand by your side at the Meeting of Creditors, preparing you in advance for the questions you’ll face. They’ll also handle any disputes or objections raised by creditors or the trustee. Having an advocate ensures your rights are protected throughout the proceedings.

Maximizing Your Fresh Start

One of the main goals of Chapter 7 is to give you a clean financial slate. An experienced lawyer helps you avoid mistakes that could limit the benefits of your discharge. With their guidance, you’ll have the best chance at a smooth process and a stronger financial future.

Having an experienced legal advocate not only reduces stress but also increases the likelihood of a smooth process and successful discharge.

Get Help from The Law Group of Northwest Arkansas PLLC

At The Law Group of Northwest Arkansas PLLC, we guide clients through every step of the bankruptcy process and help them avoid common pitfalls. If you’re considering Chapter 7, our team can evaluate your eligibility, explain your options, and work to protect your future.

Call us today at (479) 334-3411 or complete our online form to schedule a free initial consultation.

References:

• United States Courts, Chapter 7 & 13 Bankruptcy Basics, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
• Cathy Moran, Bankruptcy in Brief, https://www.bankruptcyinbrief.com/chapter7/