It may seem like an oxymoron to discuss the “benefits” of bankruptcy, but the reality is that in some cases, bankruptcy can be the second chance that you or someone needs to get back on their feet financially. Unlike bankruptcies from a century ago, bankruptcies of today are an opportunity for creditors to recover some portion of the debt owed to them, while allowing the debtor to remain in possession of those assets that they need to be able to get back to being solvent.
There are two forms of consumer bankruptcy in the United States: Chapter 7 (aka liquidation bankruptcy) and Chapter 13 (aka reorganization bankruptcy). In this blog, we will focus on Chapter 7 or liquidation bankruptcy.
Chapter 7 bankruptcy works by taking non-essential assets belonging to the debtor, selling them off, and distributing the proceeds to the various creditors. The “liquidation” occurs when those non-essential assets are turned into cash that is then used to pay off the debtor’s debts. Assets that are deemed essential are not liquidated. Those include the person’s house, car, and assets that they use to make a living. Pensions can even be considered essential assets. What is left is collected and sold off.
This type of bankruptcy is not available to everyone. It is designed for individuals who have no disposable income whatsoever. It is limited to those who are of truly limited means, which is determined by a means test. That is, if your monthly income is lower than the median income of household of the same size in your state, then you have passed the means test and are eligible for Chapter 7 bankruptcy. By using this type of test—which is necessarily tied to the state-specific median incomes—the law recognizes that different areas have different medians.
Even if your income is above the median for a household of your size in your state, you can still be eligible for Chapter 7 bankruptcy, but the calculus becomes more complicated. Basically, the question comes down to your disposable income, which is the income you have left over after paying your allowed monthly expenses. There are numerous formulas for determining exact figures, but suffice it to say that if your disposable income is above a certain level, you will not be eligible for Chapter 7 bankruptcy.
Since the focus of Chapter 7 bankruptcy is liquidation, rather than re-negotiating debts, it is a faster process than Chapter 13. On average, a Chapter 7 bankruptcy takes approximately four to six months from filing to discharge. Of course, it can take longer depending upon the issues that come up. While the bankruptcy itself may not take that long, it does have a lasting effect on your credit report. The Fair Credit Reporting Act allows bankruptcy to be reported on credit reports for 10 years from the filing date (not the discharge date).
Those who emerge from Chapter 7 bankruptcy will also be faced with starting over with only what was deemed essential assets. A house and a car are very important, but it can be difficult to move on from there towards getting back on financial solid ground.
If you are facing bankruptcy, don’t go alone. Having a trusted, experienced, and compassionate attorney by your side through the process can make a world of a difference. Let Carolyn Duncan provide you with the legal assistance you need to work through bankruptcy. Contact Carolyn Duncan today to get started.