Personal Bankruptcy

Personal bankruptcy filings are available for people who find themselves in debt over their heads.  Individuals can file a Chapter 7 bankruptcy and Chapter 13 bankruptcy. Each of these sections of the federal code provides a procedure for individuals who cannot pay their debts.  A Chapter 7 bankruptcy filing is known as a straight bankruptcy.  It requires the liquidation of non-exempted assets with the proceeds of the liquidation being used to payoff non-secured debts. In a Chapter 13 bankruptcy filing the debt is restructured with a three to five year payments schedule.  The debt is paid off instead of being discharged.

New Personal Bankruptcy Laws

     The 2005 bankruptcy law requires consultation with a debt counselor before filing under either Chapter 7 bankruptcy or Chapter 13 bankruptcy.  The debt counselors agency must be approved by the United States Trustees office, under the US Bankruptcy Court.  The purpose of the debt counseling agency is evaluation of the debtor to see if he qualifies for personal bankruptcy.  The 2005 law only allows a Chapter 7 bankruptcy filing if the debtor passes a means test.  This test determines monthly income as a six month average that is then compared to the median income for the area and family size.  The debtor cannot file under Chapter 7 Bankruptcy  if his income exceeds the mean.  If his income does not exceed the mean, then disposable income is calculated.  This is the amount of income available after allowable expenses are deducted.  Allowable expenses are based on IRS standards, not on the actual expenses of the debtor. The debtor can only file for Chapter 7 bankruptcy if is disposable income if $100 or less.

Personal Bankruptcy Procedure

     Once it is determined that the debtor can file for a straight bankruptcy, there has to be an asset valuation.  Which assets are exempt from liquidation may vary from state to state.  If the state method of asset determination is used, it is best to check the requirements in the appropriate state.  The debtor has to have lived in the state for two years or longer.  Asset valuation is based on the replacement value from a retail vendor.  Once this takes place the court appointed trustee proceeds to liquidate the assets and pays off the creditors with the proceeds.  Any unsecured debts remaining are discharged, or written off.  Secured debts are not discharged because the property can be claimed.  Other debts, like alimony, DWI, child support and most student loan obligations are also not discharged.  The 2005 law requires the filer to attend a financial management class.  When the filer does this, the proceedings are considered to be complete.  The filer cannot file under Chapter 7 Personal Bankruptcy  again for six years and will have the bankruptcy filing on his credit record for ten years.  

From beginning to end, a Chapter 7 bankruptcy filing takes about three to four months.  The filer is out from under the burden of debt and basically starts over and must build a new credit record after filing personal bankruptcy.