Bankruptcy is a process in which consumers and businesses can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. For the most part, bankruptcies can be divided into two types — liquidation and reorganization, and for individuals they are called Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is a liquidation bankruptcy. It’s called liquidation because the bankruptcy trustee may take and sell (“liquidate”) some of your property to pay back some of your debt. However, you may keep property that is protected (also called “exempt”) under state law. There are several types of reorganization bankruptcies, but Chapter 13 is the most common type for consumers. In Chapter 13, you keep all of your property, but must make monthly payments over three to five years to repay all or some of your debt.
Chapter 7 is the preferred chapter of bankruptcy for many people because if you qualify you do not have to pay creditors back through a long and tight payment plan. Although this is called a liquidation chapter, in most cases you can keep your home through a reaffirmation agreement or homestead exemption. Also, depending upon whether it is a joint or single filing you can keep up to $20,000.00 of personal property including cash, cars, boats, and any kind of property that is considered personal and not real property or land.
In order to be eligible for Chapter 7, you must meet several criteria. Your income cannot be over a certain amount, and if it is, you must pass the “means test.” In addition, the court will dismiss your case if you have filed a previous bankruptcy within a certain period of time, or if the court believes you are cheating your creditors.
The first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your “current monthly income” against the median income for a family of your size in your state. Your “current monthly income” is your average income over the last six months up to filing for bankruptcy. If your income is less than or equal to the median, the law presumes that you are eligible for Chapter 7 bankruptcy.
As you can see, there are many variables at play for a bankruptcy case. I provide you with a free consultation to determine whether you should file for bankruptcy and which is best for you, if any.