Bankruptcy provides a legal process for write-offs or restructuring of debt and a financial fresh start. Bankruptcy is a complex procedure with long-term consequences.
Types of personal bankruptcy: chapter 7 and chapter 13
Individuals typically file for bankruptcy under two sections of the US Bankruptcy Code: Chapter 7 and Chapter 13.
- Chapter 7 bankruptcy (Liquidation): Often referred to as “straight bankruptcy,” Chapter 7 involves the sale of a debtor’s nonexempt property to pay creditors. It most often leads to the discharge of most unsecured debts, such as credit card debt and hospital bills, in a few months. Chapter 7 has a few non-dischargeable debts, and there are requirements to qualify.
- Chapter 13 bankruptcy (Reorganization): Chapter 13 allows a person with regular income to propose a repayment plan to pay off all or part of their debts within three to five years. Chapter 13 is best for individuals who prefer to retain property, like a home or car, and have the ability to make monthly payments according to the court-approved plan.
Eligibility criteria
The filing qualification for Chapter 7 or Chapter 13 depends on a couple of items:
- Chapter 7: The “means test” must be performed by the debtors, i.e., comparing their income against the state median income. Under the state median income, they qualify; more than the state median income, additional computation makes them eligible or not.
- Chapter 13: Debtors must have regular income and secured and unsecured debt below specified levels, revised from time to time.
The filing process
Bankruptcy filing involves some important steps:
- Credit counseling: Debtors are obligated to pre-file a completed credit counseling course within 180 days. The requirement ensures that debtors are advised on alternatives to bankruptcy.
- Preparation of papers: All financial papers must be collected. These consist of income statements, tax returns, debt and asset schedules, and monthly living expenses.
- Filing a petition: The debtor files a bankruptcy petition with the appropriate US Bankruptcy Court accompanied by schedules of assets, liabilities, income, and expenses. Filing fees are charged, but waivers or payment in installments can be requested by those who qualify.
- Automatic stay: An automatic stay is imposed at filing, which halts most collection activities, including lawsuits, wage garnishment, and creditor contact.
- Trustee appointment: The court appoints a trustee to administer the case. In Chapter 7, the trustee handles asset liquidation; in Chapter 13, they review the repayment plan.
- Meeting of creditors (341 meeting): The debtor must attend the meeting, where the trustee and creditors are able to inquire about finances and the plan suggested.
Debt Repayment or Discharge:
- Chapter 7: Non-exempt property is liquidated, and dischargeable debt is discharged within a few months.
- Chapter 13: The debtor makes periodic payments as dictated by the confirmed plan within three to five years. Upon payment completion, any excess eligible debt is discharged.
Legal counsel and support
While it is possible to file for bankruptcy pro se (by oneself), taking advantage of the legal guidance of an attorney is strongly recommended since bankruptcy law is complicated and can have extreme monetary consequences. Seasoned bankruptcy lawyers can provide important guidance particular to an individual’s case.
For people who cannot hire attorneys, groups like Upsolve are available to assist. Upsolve is a nonprofit internet site that enables low-income American individuals to complete and file for Chapter 7 bankruptcy without attorneys.
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Current trends and considerations
Filings for bankruptcy follow the general state of the economy. The recent hike in Federal Reserve rates has led to an uptick in bankruptcy filings, signaling a shift in the economy.
Additionally, the stigma associated with bankruptcy often deters individuals from filing, despite its potential benefits. For example, Alexza, a Midwest native, struggled with credit-card debt for a decade and initially hesitated to file for bankruptcy due to feelings of failure and the prohibitive cost. She eventually filed in September 2021, erasing nearly $20,000 in debt.
