About Bankruptcy

Bankruptcy is a process in which consumers and businesses can remove or repay some or all of their debts under the protection of the federal bankruptcy court. Mostly, bankruptcies can be divided into two types; liquidation and reorganization. Requiring a full, public disclosure of all their assets and liabilities.

Bankruptcy will unfortunately hurt their credit greatly and can remain on their credit report for up to 10 years. The costs for filing for bankruptcy can be significant . Still, there are times when filing for bankruptcy could be the best available option, especially if they have already attempted some of the alternatives to bankruptcy, such as credit counseling and debt settlement.

New Bankruptcy Requirements: Means Test, Median Income, and Counseling

Chapter 7 or also known as liquidation bankruptcy. All non-exempt assets are sold and the earnings are used to pay the debtor’s unsecured commercial creditors. The Debtor’s obligations are then considered paid off. The debtor may choose whether they want to continue their mortgage and car loans, in which case those assets are not included in the bankruptcy estate.
Not every debt may be voided under Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made it much more difficult to qualify for a Chapter 7 bankruptcy. Now, in order to successfully dismiss their debts in a Chapter 7, they are now required to pass a “means test.” The means test will investigate their income and their living expenses, in order to determine if they have the means to make reasonable payments to their creditors or not. Also, credit counseling must take place before they file for bankruptcy; debtor education must take place after they file.

Chapter 13 also known as “wage-earner’s” bankruptcy. This is a court ordered debt management program where the court appointed trustee creates a budget that will allow the debtor to pay back all of their debt within 5 years. The regulation behind a Chapter 13 Bankruptcy is that the debtor then makes their payments to their creditors through the trustee until all of their debts have been repaid.

Most people consider filing bankruptcy as a last resort. Because of the costs, the long term effects on their credit, the public nature of bankruptcy, and the fact that it may be more difficult to qualify for a Chapter 7 than before, it makes good sense for them to look into all the available alternatives to bankruptcy, before choosing to file.