Understanding Bankruptcy Law in the United States
If you’re in severe debt, then you might have considered filing for bankruptcy. However, bankruptcy is not always the best option and it could put a stain on your credit record that will be hard to recover from. There have been some recent changes in legislation that make it more difficult to file, so before you decide to do this, you have to make sure you understand how the process works and what to expect. Here’s an introduction to bankruptcy law and the filing process in general.
Understanding the Different Chapters
If this is for personal bankruptcy, you can either file for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.
With a Chapter 7 bankruptcy, you get to keep exempted assets, but things like credit card debt and other forms of unsecured credit will be discharged. Your secured debt will be repaid through the realization of your non-exempt assets. However, things like child support and student debt will not be discharged. This is often the best option for people with limited assets and income, but a lot of debt.
With a Chapter 13 bankruptcy, you will be required to repay your entire debt over the course of 3-5 years by submitting to a logical repayment plan. A trustee will be appointed to collect the payments and distribute them to creditors. And through a Chapter 13, you will still be able to keep your property, which is a good option if you’re trying to avoid a foreclosure. People who choose this option usually either want to be able to protect non-exempt property or buy additional time in case of a looming property seizure or foreclosure.
What the 2005 Law Changed
The BAPCPA act was implemented to prevent people from abusing the bankruptcy system. The legislation had far-reaching effects on the process and is compelling more people to go for Chapter 13 over Chapter 7.
One of the things that the law changed is that your income before the bankruptcy will be compared against a comparable household in your particular state. Your current monthly income will be used to estimate your average income for the next six months. If you fall under the average income in your state, then you’ll be eligible for a Chapter 7. But if you’re over, you’ll have to take the Means Test and pass in order to file.
What’s the Means Test?
In the Mean Test, remaining disposable income will be calculated by deducting specific expenses, which are set by the IRS. Secured debt repayments will also be subtracted from your current monthly income. If after that, you are left with $100 or less, then you’ll instantly be eligible for Chapter 7. If it’s over $100 but lower than $166.66, this amount will be multiplied by 60. This will allow you to determine if you’ll be able to repay at least 25% of your total unsecured debt within five years. If that’s the case, then you will be forced to file for a Chapter 13. But if you can’t, you will be eligible to file for a Chapter 7.
If you’re still unsure of which option would be the best for you, it would be wiser to consult with a bankruptcy attorney. Firms like Tully Rinckey, for instance, will be able to advise you on which way to go and might be able to give you alternative solutions that will prevent you from having to file in the first place.
Filing for bankruptcy is very serious and far from a get out of jail free card. Make sure that you understand the full implication of filing and that you consult a professional if you’re still unsure about your decision (or need more clarifications about the process).