Bankruptcy serves as a legal process available to both individuals and businesses, offering the opportunity to either eliminate or repay a portion or all of their debts under the safeguard of the federal bankruptcy court. This process generally falls into two main categories: liquidation and reorganization. For individuals, these are referred to as Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 bankruptcy is commonly known as liquidation bankruptcy due to its nature. In this scenario, the appointed bankruptcy trustee holds the authority to liquidate certain assets, converting them into funds to repay a portion of the debt owed. Nonetheless, it’s important to note that you can retain property protected under state law, often referred to as “exempt” property. On the other hand, Chapter 13 bankruptcy is a prevalent choice for consumers seeking reorganization. Under this chapter, you retain ownership of all your assets, but commit to making regular monthly payments spanning from three to five years to gradually settle some or all of your debt.
Chapter 7 stands out as the favored bankruptcy chapter for many individuals, primarily due to the potential avoidance of lengthy and constraining payment plans to creditors. Despite its “liquidation” label, in most instances, you can hold onto your residence through a reaffirmation agreement or homestead exemption. Moreover, depending on whether you’re filing individually or jointly, you might be allowed to retain up to $20,000.00 worth of personal property, which includes items like cash, vehicles, boats, and other non-real estate possessions.
Eligibility for Chapter 7 involves meeting certain criteria. Your income must not exceed a predefined threshold, and if it does, you need to pass a “means test” to qualify. Additionally, the court may dismiss your case if you’ve previously filed for bankruptcy within a specific timeframe or if there’s reason to believe you’re acting in bad faith towards your creditors.
To determine your eligibility for Chapter 7 bankruptcy, the initial step is to compare your “current monthly income” with the median income for a family of your size in your state. This income calculation takes into account your average earnings over the six months leading up to your bankruptcy filing. If your income aligns with or falls below the median, the law assumes you are qualified for Chapter 7 bankruptcy.
As you can observe, the dynamics of a bankruptcy case involve numerous variables. I offer a complimentary consultation to help you assess whether bankruptcy is the right choice for your situation and guide you in selecting the most suitable approach.