Bankruptcy

Filing for Bankruptcy – Chapter 7

The main purpose of a Chapter 7 bankruptcy is to discharge certain debts to give an individual debtor a “fresh start.” In order to do this, unsecured debts are generally discharged. But, the Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 made it more difficult for some people to be eligible to file a Chapter 7 bankruptcy. As of October 17, 2005, a debtor may not file bankruptcy under Chapter 7, as a consumer or business, if capable of paying off creditors based on the “means test.” The means test considers average annual income. If the income is less than the median income for your state then you qualify for Chapter 7 (medium income data is derived from U.S. Census Bureau statistics). but, if your income is more than the median, then the means test compares your excess monthly income and your amount of debt to determine how much you can pay your creditors. After applying the means test, only those who are incapable of paying their debts are allowed to file a Chapter 7 (discharge) bankruptcy. Those who are capable of paying will either have their case dismissed or converted to a Chapter 13 (repayment plan) bankruptcy.

Filing for Bankruptcy – Chapter 13

A chapter 13 bankruptcy is also called a wage earner’s plan. It allows individuals with regular income to develop a plan to repay all or part of their debts. Under Chapter 13, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. § 1322(d). During this time the law forbids creditors from starting or continuing collection efforts.