Understanding the Different Bankruptcy Filings

Whether you face personal financial challenges or your business has fallen upon difficult times, there are options available to you under the federal bankruptcy laws. This blog post provides an overview of the most common types of bankruptcy filings.

Chapter 7 Liquidation Proceedings

The protections afforded by Chapter 7 are available to individuals or businesses. In a Chapter 7 petition, you are allowed to permanently discharge most types of debts. In a Chapter 7 bankruptcy you are allowed to “exempt”, or protect your assets up to a certain dollar amount. In more than 95% of all bankruptcy cases, the person who files for bankruptcy keeps everything they own. In a Chapter 7 certain debts, such as child support arrearages, student loans (except under very limited circumstances) and some tax obligations cannot be wiped out. Each state has its own state based exemptions, and some states allow their residents to use the federal property exemptions. You may choose the state or the federal exemption, but not both. Once your Chapter 7 bankruptcy if finalized, you are permanently freed from any obligation to repay any debts discharged.

In 2005 Congress added a “means test” to the bankruptcy code. The means test determines if an individual or couple makes “too much money” to file a Chapter 7 and instead must file a Chapter 13 to repay their creditors a portion of what is owed. For the vast majority of people looking to file bankruptcy, the means test has no impact on their ability to file Chapter 7. It is simply false to say that you “can’t file a Chapter 7” or that is it “much harder to file a Chapter 7”.

Chapter 13 Reorganization

In a Chapter 13 filing, you pay what you can afford to pay on a monthly basis. Your creditors will receive a percentage of what they are owed, and at the end of your three to five year plan, the balance of what is owed is wiped out.. As with a Chapter 7 petition, you are immediately protected by the automatic stay, which prohibits your creditors from calling, writing or taking legal action against you to recover a debt.. As long as you honor the terms of the reorganization plan, your creditors may not make any other attempts to collect any debts you owe.

Chapter 11 Business Reorganization

A Chapter 11 bankruptcy filing allows a business to obtain the protection of the automatic stay, and to negotiate new payment arrangements with creditors, in a fashion similar to the Chapter 13 petition for individuals. Chapter 13 has debt limits and if an individual owes more money than what is allowed, they will be required to file a Chapter 11 case in order to reorganize.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

Do I Qualify for a Chapter 7 Bankruptcy Filing?

Qualifying to Permanently Discharge Debt under Chapter 7

In the revisions to the federal bankruptcy laws in 2005, Congress changed the eligibility of individuals for the permanent discharge of debts under Chapter 7. Prior to filing any kind of bankruptcy you must take a credit counseling course. This course can be taken online, over the phone, or in person. In addition you must take a debt management course after you have filed your case, but before you receive a discharge of your debts. To be eligible for a Chapter 7 discharge you must also demonstrate that your bankruptcy filing is not an abuse of the bankruptcy process. For most people this is determined by the “Means Test.”

What Are the Requirements of the Means Test?

Under the new law, you must demonstrate that you qualify to rid yourself permanently of such debt, submitting to a “Means Test,” a mathematical test designed to determine whether you ‘make too much money’ to file a Chapter 7 bankruptcy.

The formula for determining whether you can file for bankruptcy protection under Chapter 13 starts with a calculation of your “disposable income.” The bankruptcy court will take the average of your income over the six months prior to your filing. If your average monthly income is less than the median income for a household of the same size in your state, you qualify and can file a Chapter 7 petition. You won’t need to look at any other components of the test. Income used for purposes of the means test can include wages, interest or dividends, child or spousal support, rental property income, unemployment compensation, and workers’ compensation. Some types of income, such as certain social security payments, are not counted in the Means Test as income.

If you have more income than the median income for a household of your size in your state, your attorney must next calculate how much “disposable income” you have. The Means Test takes your income and deducts certain allowable expenses, as determined by the Internal Revenue Service and by some of your actual expenses. The Means Test will then look at how much “disposable income” you have, calculated over a five year period. If this number is more than $118.00 per month, then you may be required to file a Chapter 13 and pay a portion of your debts to your creditors. In a Chapter 13 your debts will be forgiven just like in a Chapter 7, but a Chapter 13 requires you to make some payments on account of your debts.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).