A Basic Guide to Consumer Bankruptcy Part I

This post is Part I of a two-part series that will provide a brief overview of consumer (individual) bankruptcy. The goal of these posts is to provide background information and a glimpse of the bankruptcy processes.

Chapter 7

Bankruptcy is a court process held in Federal court that is designed to allow consumers and businesses to eliminate or repay debts under the supervision of the court. The most common reasons individual debtors file for bankruptcy include medical expenses, credit card debt, or a major life event such as job loss or divorce.

The governing law for filing any type of bankruptcy is the Unites States Bankruptcy Code, which is found at Title 11 of the Unites States Code and further divided into chapters. The two basic types of bankruptcy that apply to consumers are Chapter 7 and Chapter 13. Each chapter carries different rights, obligations, and procedures for all parties involved. One of the first steps to filing bankruptcy is determining which chapter you must file under.

To qualify for Chapter 7 bankruptcy, you must meet specific eligibility requirements outlined under a “means test.” If an individual’s monthly income is below the state’s median income, then they are eligible for Chapter 7. Not all consumers will qualify for Chapter 7. If the consumer has sufficient disposable income to fund a debt repayment plan under Chapter 13 bankruptcy, the court will not allow the person to file Chapter 7.

One of the more common types of bankruptcy filed among individual consumers is Chapter 7, commonly known as a liquidation bankruptcy. In a Chapter 7 bankruptcy, the trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay creditors in accordance with the provisions of the Bankruptcy Code. Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain “exempt” property; but a trustee will liquidate the debtor’s remaining assets. Accordingly, potential debtors should realize that the filing of a petition under Chapter 7 may result in the loss of property.

Chapter 7 debtors must first participate in credit counseling prior to filing for bankruptcy. A credit counselor may be able to suggest alternatives that will keep you out of bankruptcy.

The case begins when the debtor files a petition with the bankruptcy court. Specific schedules and statements, in addition to other documents must be filed with the petition to begin the case. An “automatic stay” goes into effect upon filing the petition, creating a legal barrier to collection actions by creditors.

After the bankruptcy petition is filed, there will be a Meeting of the Creditors, or 341 Meeting. At the meeting, the debtor answers questions from both the trustee and creditors about their petition, assets, and liabilities while under oath. If neither the trustee or creditors object to the debtor’s discharge, the bankruptcy court will automatically give the debtor a discharge at some point after the last day to object.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. Additionally, the right to a discharge is not absolute, and some types of debts are not discharged.

Individuals have the right to file bankruptcy without an attorney. However, filing for bankruptcy can be a very complicated process. Here at TLGNWA, we are equipped to help you avoid common pitfalls when filing for bankruptcy. Call 479-316-3760 to arrange 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/