Are you baffled about how to file bankruptcy? If so, you aren’t alone. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was implemented to reduce the number of frivolous bankruptcy filings. Prior to BAPCPA, many Americans were filing Chapter 7 to write-off thousands of dollars in credit card debt. The new bankruptcy laws put an end to that practice by requiring debtors to undergo tests to determine how much debt they can afford to repay.
Learning the intricacies ofgenerally requires the services of a bankruptcy lawyer. While hiring an attorney to assist with filing bankruptcy is not required, few people can complete this task without legal assistance. Individuals who go through the process without legal representation could place themselves at risk for having their petition rejected by the court.
The first step of filing bankruptcy requires debtors to determine which bankruptcy chapter is best suited for their needs. Six bankruptcy chapters exist and include: Chapter 7, 9, 11, 12, 13 and 15. Chapters 7 and 13 are used for personal bankruptcy petitions, while the remaining chapters are used for business.
Chapter 7 is also referred to as “liquidation bankruptcy” because debtors must relinquish assets to repay outstanding debts. Not all debts can be discharged under Chapter 7 bankruptcy. Outstanding child support, delinquent taxes, government funded student loans, and pending lawsuits are exempt from bankruptcy protection.
Chapter 13 is referred to as “reorganization bankruptcy” and debtors are required to repay a portion of outstanding debts. Debtors are allowed to keep assets by establishing a repayment plan. Chapter 13 repayment plans generally last three to five years. Payments must be made to the bankruptcy Trustee who will then disburse payments to creditors.
Debtors filing for personal bankruptcy are required to undergo the ‘means’ test; a financial tool used to determine debtors’ income. The means test compares the debtor’s income to their states’ median income level. If debtors meet or exceed median income levels they must file for reorganization. If income is below median levels, debtors are allowed to file for Chapter 7.
Another element of BAPCPA is debtors are required to undergo credit counseling through an approved agency. Credit counseling must occur no more than 180 days prior to filing for bankruptcy protection.
The majority of people who file for personal bankruptcy are required to file Chapter 13 and establish a repayment plan. Approximately 60-percent of debtor’s disposable income is contributed toward repayment of debt.
Debtors are not allowed to take on any new debt while repaying debts under Chapter 13 repayment plans. The exception is if debtors face an emergency situation or need to make a major purchase such as an automobile or college tuition. Major purchases must be approved by the bankruptcy Trustee.
Chapter 13 payments can place serious financial restrictions on debtors and cause them to. When debtors are unable to adhere to the repayment plan, creditors can petition the court and request the judge to dismiss the bankruptcy. When this occurs, the bankruptcy judge can either allow the debtor to file for Chapter 7 or dismiss the bankruptcy. When bankruptcy filings are dismissed, debtors lose court protection and creditors can initiate collection actions, including foreclosure.
Individuals can obtain complete information regarding the Bankruptcy Abuse Prevention and Consumer Protection Act via the U.S. Department of Justice website at usdoj.gov. The U.S. Trustee Program provides consumers with bankruptcy information, forms, resources, and approved credit counseling and debt education agencies.
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