Bankruptcy

Bankruptcy

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Bankruptcy is when a debtor, or borrower, is unable to repay its creditors. It is determined by the court system. The process can be initiated by either the borrower or the creditors filling a petition with the court system. Borrowers initiate the process when they hope to either eliminate their debt or to minimize it during a work out plan. Creditors initiate the process when they want to force a debtor to repay what is owed to them. debt consolidation, bankruptcy alternative, debt assistance, filing bankruptcy,

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There are three types of bankruptcy:

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Chapter 7, Liquidation (for individuals or companies) debt consolidation, bankruptcy alternative, debt assistance, filing bankruptcy,

Chapter 13, Adjustment of amount of debt (a workout for individuals) debt consolidation, bankruptcy alternative, debt assistance, filing bankruptcy,

Chapter 11, Reorganization (a workout for companies and self-employed individuals) debt consolidation, bankruptcy alternative, debt assistance, filing bankruptcy,

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Since this website was created to provide financial information to individuals, we will focus our bankruptcy discussion on individuals, not businesses.

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Requirements

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To file for bankruptcy and individual must not have been discharged through a chapter 7 bankruptcy proceeding in the previous 8 years.

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An individual is also required to receive “individual or group briefing” credit consoling and debtor education within 180 days before filing. The counseling must be from a nonprofit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator.

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Individuals must also complete an “instructional course concerning personal financial management.”

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To qualify for Chapter 7 (discharge of debt); an individual’s average monthly income must not be above the average monthly income in their state for a family of the same size. If the individual’s current monthly income does exceed the state’s average, than a mean test is applied. The mean test is taking the current monthly income and reducing it by allowable deductions and measuring the result to 2 scenarios. The first scenario is whether the individual has at least $166.67 remaining. If so than the court disqualifies the individual from chapter 7. The second scenario is to measure the remaining monthly income (after allowable deductions) to $100 and 25% of the amount of debt. If the remaining income amount is at or above $100, and the amount can pay of 25% of the total debt within 5 years, than the individual is disqualified for chapter 7. Allowable deductions include: 1) 1/60th of all secured debt that will become due in the five years after the filing of the bankruptcy case , (2) 1/60th of all priority debt, (3) living expenses specified under the ‘’collection standards of the Internal Revenue Service,’’ (4) actual expenses not provided by the Internal Revenue Standards including “reasonably necessary health insurance, disability insurance, and health savings account expenses,” (5) expenses for grade and high school, up to $1,500 annually per minor child provided that the expenses are reasonable and necessary, (6) expenses for protection from family violence, (7) continued contributions to care of nondependent family members, (8) actual expenses of administering a chapter 13 plan, (9) additional home energy costs in addition to those laid out in the IRS guidelines that are reasonable and necessary, (10) continued contributions to tax-exempt charities

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An individual can petition to have the court consider other allowable deductions that may lower the remaining monthly income. It is up to the court as to whether or not they will be allowed.

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An individual disqualified from chapter 7 may still use chapter 13 bankruptcy.

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Chapter 7

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Under Chapter 7 bankruptcy, individuals are required to turn over some of their liquid assets, money, and to sell off some of their property to pay down their debt to the creditors. The properties individuals are permitted to keep are:

Personal household goods

Clothing, furniture, pets and so forth up to

$400 per item but not exceeding $8,000.

Jewelry up to $1,000.
Home equity and burial plot up to $15,000.
Interest in a motor vehicle up to $2,400.
Other property up to $800 plus up to $7,500 of any unused portion of the $15,000 exemption for equity in a home/burial plot.
Business items up to $1,500
Life insurances
Professional prescribed health aids
Veteran’s disability
Unemployment benefits
Alimony & Child support
Social Security, Pensions and Annuities
Traditional & Roth IRAs up to $1 million.

(SEP and SIMPLE and rollover accounts do not qualify).

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Once one finishes Chapter 7 bankruptcy, most debts are discharged and are no longer requiring repayment. Some debts are not dischargeable: Alimony, Child support, intentional tort lawsuit obligations, federal student loans, ECT.

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Chapter 13

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Under chapter 13 bankruptcy, debt is not fully discharged. Some portion of debt is to be repaid back to the creditors. The amount is worked out in court between the creditors and the individual and is paid in schedule intervals. To file for chapter 13, you have to be employed and be receiving a regular income. Chapter 13 also requires that the total amount of unsecured debt must not be more than $306,675 and the amount of secured debt be less than $922,675.

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