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Bankruptcy: The Big Picture (Part I)

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This post was prepared by yours truly, with contributions from Phil Bradford, a financial web content writer. Phil graduated from New York University School of Law and recently joined Herald University as a reporter. He has also written for websites such as debtfreeguys.com and disabilitycanhappen.org

An now, on with the post…

Those who’ve exhausted their financial options or are unable to meet obligations due to illness, divorce, job-loss, or other life-altering events, may consider filing Bankruptcy to get their life back on track.  Here is a quick-guide to help you navigate the process with the help of a good Bankruptcy Lawyer:

Basic Types of Bankruptcy

The most basic distinction when thinking about Bankruptcy is the one between a liquidation (Chapter 7) and a reorganization (Chapter 13 for most people). Whether you need to file a Chapter 7 or 13 case will depend on several factors, including:

  • Total “household” income
  • The value of your property
  • What you stand to lose
  • What you intend to keep

That said, below you will find a few of the most important points when considering if Bankruptcy is right for you.
Debts Discharged in Bankruptcy

Typical debts discharged in Bankruptcy include:

  • Credit Cards
  • Leases
  • Unsecured loans
  • Medical bills
  • Payday loans
  • Mortgage(s) (may lose your home)
  • Auto Loans (may lose your car)
  • Items in collection
  • Judgments
  • 3+year old taxes and penalties

Debts Not Discharged in Bankruptcy

While there are exceptions, the following types of debts are considered nondischargable:

  • Student loans and interest
  • Child support and alimony
  • Debts acquired through fraud
  • Unscheduled debts
  • Tax Debt less than 3 years old
  • Criminal restitution and fines

Costs and Fees

Every legal remedy has a cost associated with it – both a government imposed filing fee and accompanying Attorneys’ fees.  Currently, the filing fees for the most common types of consumer Bankruptcy are:

$335      Chapter 7 liquidation

$310       Chapter 13 reorganization

In addition to standard filing fees, since the Bankruptcy laws underwent a major shift in 2004 additional mandatory expenses have been added in the form of due diligence requirements.

Qualifying for Bankruptcy

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced an entirely new set of criteria related to filing Bankruptcy.

Means Test

BAPCPA introduced the first test to determine who was eligible to file Bankruptcy under a given chapter; the Means Test.

The Means Test uses census and IRS records to determine average incomes and expenses in every State and zip code in the country, then calculates monthly disposable income by subtracting expenses from income (using an average of the past 6 months). If the result is below the median for your State, you can file Chapter 7 liquidation. If it is higher than the median then, with some exceptions, you must file a Chapter 13 Plan of Reorganization.

As set out in Form B 122A-2, the Chapter 7 Means Test is calculated as follows:

Take income for the last 6 months, then subtract

The prescribed IRS living expenses for your area

And compare the resulting number with the total

Amount to pay down secured and priority debts

If the result shows that you make less than median income you may file a Chapter 7

If the result shows that you make more than median income you must file Chapter 13

Other Due Diligence Items

Other requirements for filing Bankruptcy were also introduced by BAPCPA:

  • A pre-filing Credit Counseling course
  • A post-filing Financial Management course
  • IRS tax-transcripts for 4 years prior to filing
  • Background and property searches
  • Special Bankruptcy credit-reports

Coming Soon: Part II: The Case

We hope this overview was helpful. If you think that Bankruptcy might be right for you, please contact us using the e-mail link at the end of this post, or give us a call. We are always happy to help.

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