An individual (this is generally the case because businesses go for chapter 11 mostly) can file for bankruptcy if he or she is unable to pay back his/her debt. But this (filing bankruptcy) should really be the last thing on your mind and should come into play when nothing else (debt consolidation/negotiation etc) works out. While there are other chapters of bankruptcy too (e.g. chapter 11 and chapter 13), chapter 7 is the most common kind of bankruptcy that is filed by debtors in US. Chapter 7 bankruptcy of the Title 11 entails the United States Bankruptcy Code and it manages liquidation.
The chapter 7 bankruptcy process
The first thing that happens after you file for chapter 7 bankruptcy is the appointment of a trustee who is trusted with the investigation process. The trustee looks into the financial records of the concerned company to determine facts before the Federal Court. The trustee is the one who sells off the “non-exempt” personal assets of the debtor and pays the creditors with the collections. In case of a business, he/she can ask for the closure of the company and can call to disengage its employees if he deems fit. This entire process is called the liquidation process. Only after this does the case stand closed for good.
In chapter 7 bankruptcy you can keep certain kind of assets that are classified as “exempt assets”. Through chapter 7 bankruptcy, certain unsecured debts can be discharged legally by the court. Alimony payments along with tax payments are not liquidated.
Chapter 7 bankruptcy requirements
The Bankruptcy Abuse Prevention and Consumer Protection Act, 2005 has included the need of a “means test” for chapter 7 bankruptcy cases. It’s a test to catch debtors whose income actually exceeds a certain part of their debt liability. The most important eligibility to file for chapter 7 bankruptcy is that your income has to be less than the state’s median income. Individuals, partnerships and corporations are allowed to file for chapter 7 as per the defined eligibility conditions. You are eligible only if your income is less than a certain amount per month. A bankruptcy attorney can do the right calculations for you and help you file for chapter 7 bankruptcy accurately.
Many people in the past have tried to declare chapter 7 personal bankruptcy even when they had more money than was required to pay back their debts. More than anything, the credit card companies were having a tough time extracting their debt from their clients who wouldn’t pay up under normal circumstances under some pretext or the other. But now, certain new laws have been made in order to safeguard creditors from such fraudulent abuse by the debtors. These new rules are quite hard, fast and inflexible, so to speak.
So, chapter 7 personal bankruptcy doesn’t favor debtors as much now. It is a better option to go in for debt settlement instead of personal bankruptcy in the US nowadays. Taking the assistance of a registered relief firm is advisable here. The biggest plus point is that the debtor can bargain the time required to pay off debts along with the monthly payments for the same. And creditors too agree to forego a certain amount of debt.
Note that if the individual debtor is in a position to pay back some of his/her debt in 5 years then the trustee can save the debtor from receiving a discharge under chapter 7 bankruptcy law. It gives you “automatic stay” legally and saves the creditors from causing any harassment in certain cases.
Once you have found that chapter 7 bankruptcy is the only way out, you must file your bankruptcy and debt details carefully. You must meet your bankruptcy attorney and must attend meetings with your creditors regularly.
Also, it is important to note that a bankruptcy case is recorded for a good 10 years on the individual’s credit report. It gives a bad credit rating for your future deals besides making it almost impossible to get a loan.