Chapter 7 Bankruptcy is a process known as a "liquidation bankruptcy". Notwithstanding its name, with almost all Chapter 7 Bankruptcy cases, the debtor (the individual who files for bankruptcy) does not have his/her property "liquidated" as will be explained below. On October 17, 2005 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed some of the provisions of the Bankruptcy Code which affect eligibility for consumers to file for Chapter 7 Bankruptcy. Since these changes, we now have a process which uses a standard mathematical formula called the "means test" to determine whether or not you can file for Chapter 7 Bankruptcy. If you earn more than the "means test" maximum, then you can file a Chapter 13 Bankruptcy.
With all the publicity the new bankruptcy law was given purporting the end to Personal Bankruptcy, you might think this new test will prevent you from filing Chapter 7. But, chances are, that is not true. The majority of people considering bankruptcy have no trouble passing the bankruptcy means test. Chapter 7 liquidation under the Bankruptcy Code is still an available form of Debt Relief. For example, if you are single with no dependents, as of November, 2009, your net income (take-home income) would have to be more than $46,450. If you are married with two children, your net income would have to be more than $82,450. If your income is more than the means test maximum, you can still file a Chapter 13 bankruptcy, but you would have to pay back a percentage of what you owe over a period of 3 or 5 years (Chapter 13 Bankruptcy). In both Chapter 7 or Chapter 13 Bankruptcy, the goal or purpose of the filing in essentially all cases is to receive a Discharge. A Bankruptcy Discharge is a legal forgiveness of debts.
What Debts Are Discharged In Chapter 7?
Generally, all unsecured debts are discharged in Chapter 7 Bankruptcy. Unsecured debts are any debts incurred by the debtor without a security interest. Examples of unsecured debts include credit cards debts, medical bills, and most other bills. The goal of Chapter 7 is to give the honest debtor a "fresh start" by eliminating dischargeable debts and giving the debtor an opportunity to continue to be productive members of society. Chapter 7 debtors are allowed to file a petition every 8 years.
Once you file bankruptcy, the Bankruptcy Law grants you an "automatic stay" which is a prohibition against any creditor from calling you or billing you or suing you in their attempts to collect on a debt. In other words, once you file a petition in bankruptcy, it is against the law for your creditors to harass you. Further, if your bank account is "frozen" or if you paycheck is being garnished, the creditor must immediately "unfreeze" your account and stop any garnishment or any lawsuit once you file.
Chapter 7 Bankruptcy Myths
Often, people have a perception of Chapter 7 Bankruptcy that is inaccurate or just plain not true. The following are some beliefs I often address with my clients.
A lot of people believe that they will "lose everything" if they file bankruptcy. This fear keeps people who should file for bankruptcy from doing so. New York and Bankruptcy Laws have property exemptions which provide protection for various kinds of assets. For example, in most instances, your house, car, furniture and personal property are exempt. In other words, nothing happens to your property if your property falls within the exemption parameters. Further, no matter what the value of your retirement or pension plan, you will not lose any part of your retirement or pension plan.
Another common myth about Chapter 7 Bankruptcy is the belief that your will never get good credit again. This is definitely not true! Usually, within 6 months of your bankruptcy discharge (which generally occurs about four months of filing bankruptcy), you will be getting credit card offers again. Generally, within 18 - 24 months of your discharge, your credit rating would be good enough for you to be able to finance a house or car at a competitive interest rate. In fact, many of my clients tell me that two years after filing Chapter 7 bankruptcy, their credit rating is better than it was before they filed bankruptcy.
Often, people believe that "everyone will know I've filed for bankruptcy." That too is highly unlikely. Unless you're a famous or a prominent person, the only people who will probably know about your bankruptcy filing are your creditors.
*NOTE: This article is only intended to give you a general overview of bankruptcy law. It is not intended in any way to give you legal advice about your specific situation. It is important that you seek legal consultation prior to acting pursuant to this or any other article in this Column.