Individuals who choose to file Chapter 7 bankruptcy usually do so when they find themselves under a crushing burden of personal debt for which they don't have sufficient resources to make even the minimum monthly payments. These individuals will typically have several maxed out credit cards, personal loans, and burdensome mortgages and car payments. Chapter 7 bankruptcy is often chosen in these cases as a means of finding some relief from overbearing collection efforts.
For individuals considering a Chapter 7 bankruptcy petition, it's important to note that there are some specific rules attached to the process. These Chapter 7 bankruptcy rules are designed not to punish the individual, but rather to assure that he is not taking advantage of bankruptcy simply as a means to get rid of debts he doesn't want to pay. If you follow all the rules and are still considered eligible for Chapter 7 bankruptcy, the majority of your debts will probably be discharged.
Some of the rules we will look at in this article relate to:
- who is eligible
- dischargeable debts
- assets and liabilities
- previous bankruptcies
Who Is Eligible
In simplest terms, any individual citizen of the United States is eligible to file Chapter 7 bankruptcy on a personal basis. Sole proprietors, and by that we mean individuals who own their own businesses as the only owners, are also eligible for Chapter 7 in most cases. Some corporations, partnerships, and LLC's may also be eligible for Chapter 7 if they meet certain requirements. More often than not however, those types of businesses will utilize Chapter 11 bankruptcy.
Individuals who want to file Chapter 7 bankruptcy must also complete court approved credit counseling in order to be eligible. This credit counseling is offered by agencies that have already been approved and certified by the U.S. bankruptcy court. You will be required to complete the course, which will teach you about financial responsibility and managing debt load, and then submit your certificate of completion along with your petition.
Dischargeable Debts
When a bankruptcy court looks at all of your debts it divides them into one of two types: dischargeable and non-dischargeable. Dischargeable debts include credit card balances, unsecured personal loans, unpaid medical bills, and so on. The bankruptcy court will liquidate your assets to pay these bills as much as possible. Any other balances left over at the end of the process will be discharged, leaving the creditor to take the loss himself.
Keep in mind that Chapter 7 rules dictate there are some debts that are not dischargeable. For example, you will not be free from paying past alimony or child support, past due taxes, mortgages, student loans, or debts that were incurred during the bankruptcy proceeding in which the creditor did not have sufficient time to file a legal claim. If your non-dischargeable debts make up the vast majority of your total debt load, you may not even be eligible to file for Chapter 7.
Assets and Liabilities
In order to prevent abuse of the bankruptcy laws, a court will apply what's called the "means test" to determine your eligibility for Chapter 7. The court will consider your current income sources, your total debt load, how much of the debt load is dischargeable, and the current cost of living with future increases added. By combining all of these things into a formula a court can determine whether or not you have sufficient resources to make good on all your debts. If it's determined you do have sufficient resources, you will be denied Chapter 7 bankruptcy.
In such a case the court will direct you to file a Chapter 13 petition. The Chapter 13 petition is more or less a reorganization plan which forces you to make good on all of your debts within 3 to 5 years. Chapter 13 is a way to help prevent simple liquidation among those who can really afford to pay their bill.
Previous Bankruptcies
There are some pretty strict rules regarding previous bankruptcy actions in relation to a new filing. For example, you may not have previous bankruptcy petitions dismissed by a court because of inaccuracies or bad faith within the previous 6 to 8 years, depending on the jurisdiction. Furthermore, if you or your attorneys decide to dismiss a previous bankruptcy proceeding for any number of reasons, you cannot file a new petition within 180 days in most cases.