Bankruptcy is the legal process that a person or business initiates when they are unable to meet their financial obligations. Through the legal process of bankruptcy, debtors will liquidate their assets or restructure their finances in order to fund or eliminate their debts that they are unable to pay.
There are many different types of bankruptcy, and all of the different forms are defined and governed under federal law.
What Is Consumer Bankruptcy?
Consumer bankruptcy is the legal process that occurs when an individual who cannot pay back their debts incurred for their personal needs initiates bankruptcy proceedings. Once the consumer bankruptcy proceedings are completed, the debtor that initiated the bankruptcy filing would no longer be liable for the debts they incurred, minus certain debts that are not dischargeable by bankruptcy laws.
Additionally, after consumer bankruptcy proceedings are completed, the bankruptcy court enters an official discharge order that releases the debtor from their debts. This signed discharge order would then give the debtor a clean financial slate from their dischargeable debts.
However, it is important to note that any bankruptcy filings will remain on the debtor’s credit report for up to ten years. Also, filing for bankruptcy can have other lasting consequences on the debtor. As such, initiating bankruptcy proceedings should be reserved as a last resort for debtors to utilize when they are in extreme financial hardship.
What Are the Different Types of Bankruptcy?
As mentioned above, there are many different types of bankruptcy. The three main types of bankruptcy in the United States are Chapter 7, 11, and 13. Chapter 7 Bankruptcy, which is also commonly referred to as “liquidation bankruptcy,” allows an individual to discharge all of their debts that can be legally discharged. However, there are specific rules regarding who can qualify and initiate Chapter 7 bankruptcy proceedings.
What Is Chapter 7 Bankruptcy?
In order to be eligible to file for a Chapter 7 bankruptcy, a debtor’s income must be either equal to or below the median income in their state. Each state will have a different income requirement for filing a Chapter 7 bankruptcy. If the debtor’s income is above the requirement for their state, the court may apply a “means test” based on their previous six months of income, but this is not guaranteed.
For example , in the state of Ohio, the median income to file a Chapter 7 bankruptcy as of 2022 is as follows:
- 1- Person Family: $51,297;
- 2- Person Family: $64,665;
- 3- Person Family: $77,643; and
- 4- Person Family: $93,239.
It is important to note that for families over 4 persons, the Ohio bankruptcy code provides that $8,400 per person be added to the highest median income for a family of 4 persons. This means that a 5- person family would be $101,639, a 6- person family would be $110,039, etc.
If an individual is eligible and initiates a Chapter 7 bankruptcy filing, the court will issue an automatic stay for the filer. An automatic stay is a legal tool that will prevent creditors from attempting to collect on the debts that the filers owe during the bankruptcy proceedings.
Automatic stays also serve to prevent or pause the following actions proceeding or being made against the bankruptcy filer:
- Pending lawsuits against the debtor;
- Wage garnishments of the debtor;
- Filing of liens against the debtor; or
- Seizure of the debtor’s property.
What Is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy, also commonly referred to as “wage earner’s bankruptcy,” is a way for a debtor to restructure their debts to afford payments. Chapter 13 bankruptcy is generally reserved for individuals with incomes higher than their state median but can also be utilized by those who wish to keep their property intact.
Under Chapter 13 bankruptcy, some debts may be eligible for discharge, while others require full payment through a payment plan. Examples of common payment plans are anywhere between three and five years.
An individual is typically considered eligible for a Chapter 13 bankruptcy filing if they meet the following requirements:
- They’re either an individual or married couple;
- As of April 2022, Their total secured debts are equal to or less than $1,395,875.00;
- As of April 2022, their total secured debts are equal to or below $465,275;
- They have not had a bankruptcy petition dismissed within the last 180 days due to failure to appear or comply with the bankruptcy court; and
- They receive credit counseling through an approved counselor within 180 days of filing their petition.
As can be seen, Chapter 13 bankruptcy differs from Chapter 7 bankruptcy in that the borrower attempts to keep their property and is required to continue making payments on their debts. Similar to Chapter 7, Chapter 13 bankruptcy can also affect an individual’s credit for up to ten years after filing.
Finally, during the Chapter 13 bankruptcy payment plan process, debtors must adhere to a strict budget without lines of credit. Because of this, many borrowers tend to drop out of the payment plan.
What Is Chapter 11 Bankruptcy?
The final of the three main bankruptcy forms is Chapter 11 bankruptcy. This bankruptcy is also commonly known as “reorganization bankruptcy” and is a type of bankruptcy that is available to individuals, corporations, and partnerships. Unlike the other forms of bankruptcy, Chapter 11 bankruptcy has no limits on the number of debts involved in the bankruptcy process.
As such, this form of bankruptcy is the most common choice for large businesses seeking to restructure their debts to become profitable again. Additionally, Chapter 11 bankruptcy is generally more expensive to debtors than the other chapters, and the rate of successful business reorganizations is generally very low.
What Information and Documents Should I Have Before Initiating Consumer Bankruptcy?
If you are contemplating initiating consumer bankruptcy, there is important information and documents that you will need to gather before your meeting with a bankruptcy attorney. Before an individual can file for bankruptcy, they will need to carefully examine a client’s financial history to determine their eligibility. If filing for bankruptcy is an option for the debtor, more paperwork will then likely be needed to determine the best form of bankruptcy to file for their specific situation.
The following list is an example of the information and documents that an individual contemplating filing for bankruptcy should bring to their initial bankruptcy consultation:
- A list of all debts owed and to whom, such as any amounts owed to credit card companies;
- A complete list of all account numbers and contact information;
- All financial records pertaining to bank accounts, including savings account;
- A list of records that pertain to the prospective filers employment, such as the last 3 pay stubs and tax return;
- All receipts pertain to significant purchases, such as a vehicle or high end electronic;
- Individual tax returns and tax returns for one’s spouse, if married;
- Any and all records pertaining to any unpaid loans, such as mortgages, auto loans, student loans, and any other significant loans;
- A list of all the prospective filer’s personal property items, such as boats, cars, jewelry, or anything else that could be repossessed;
- Information regarding any real estate the prospective filer owns or rents;
- Any other financial paperwork or legal documents that the bankruptcy attorney asks for; and
- A list of any questions that the prospective filer may have for the initial consultation.
One of the most important items to bring is a list of questions that you may have regarding bankruptcy and how it will affect your debts and assets. Asking the bankruptcy lawyer any questions you may have is important because filing for bankruptcy is often a confusing and complicated process. It is important that you understand exactly what you are doing, and how filing and completing bankruptcy will affect you.
Do I Need a Lawyer for Help With Consumer Bankruptcy?
As can be seen, filing initiating consumer bankruptcy is often an extremely complicated and confusing process. There are many different steps that an individual must take and many deadlines that a prospective filer must meet during the bankruptcy process. As such, consulting with an experienced bankruptcy attorney is in your best interests.
An experienced bankruptcy attorney will be able to assist you in disputing any creditors’ assertions, as well as guide you as to the best form of bankruptcy and help guide you through the process. Finally, an attorney will also be able to represent you at any in person creditor meetings and in court, as necessary.