There are a total of six types of bankruptcies defined under Title 11 of the United States Code. While some of them deal with corporates, municipalities, international debtors and farmers or fishermen, the most common types of bankruptcy filed by individuals and small businesses fall under Chapter 7 and Chapter 13. Chapter 7 involves discharge of certain debts without repayment, whereas Chapter 13 contains provisions which allow individuals with regular wages to develop a plan to repay all or part of their debts over a number of years. Whether an individual qualifies for Chapter 7 or Chapter 13 is partly determined by their income. Chapter 7 is the most common form of bankruptcy in the US with ~65% of consumer bankruptcy filings being Chapter 7 cases.
Creditworthiness and likelihood of receiving a Chapter 7 discharge are important considerations while deciding whether to file for bankruptcy. A Chapter 7 bankruptcy stays on an individual’s credit report for 10 years while a Chapter 13 stays for 7 years. This may reduce access to low-cost credit for that period. However, high levels of debt can end up having the same impact, and removal of debt through a bankruptcy tends to improve creditworthiness.
It’s also important to note that the United States Trustee, an administrative unit that oversees the administration of bankruptcy cases, can challenge the filing by claiming it to be abusive. In cases where it can be shown that the borrower can afford to repay part of the debt out of his/her disposable incomes in the five year time frame provided by Chapter 13, the U.S. Trustee may succeed in preventing the receipt of a discharge under Chapter 7, and effectively forcing Chapter 13 upon the borrower.
There are certain exemptions and rights provided to protect the interests of the debtors during bankruptcy proceedings. During liquidation proceedings, a trustee is appointed who collects and sells the “non-exempt” property of the borrower and distributes the proceeds among the lenders. However, because all states typically permit borrowers to continue ownership of their essential property, Chapter 7 cases can often turn out to be “non-asset” cases – meaning that the bankrupt estate often has no non-exempt assets that can be liquidated to fund the demands of the creditors.
Another important feature applicable to these filings is the provision of automatic stay. Under this provision, a request for bankruptcy protection automatically halts most repossessions, foreclosures, evictions, attachments, utility shut offs and other forms of debt collection activities. It may also enable a halt on outstanding lawsuits.
Bankruptcy law in the United States has significant changed since 2005 with the passing of Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This has made it significantly more difficult for borrowers to file for bankruptcy in general, and for Chapter 7 bankruptcy in particular. While supporters of the act argue that BAPCPA would reduce credit losses for the lenders which in turn would lead to savings that they will pass on to the borrowers in the form of lower interest rates, it has been observed that although credit card company losses did reduce after the introduction of the Act, the prices that customers face saw an increase along with the profits of the companies witnessing an uptick.
With the increased requirements of the BAPCPA, filing a Chapter 7 bankruptcy has become significantly more complicated. There are a bunch of software-enabled do-it-yourself methodologies that a debtor can adopt while filing for bankruptcy, but these come with their own set of hassles and uncertainties. An alternative to the DIY approach is to engage a trained non-attorney petition preparer. However, it is important to note that these preparers can’t guarantee complete compliance or ensure that maximum advantage of the exemptions are taken. A bankruptcy attorney, on the other hand, can advise the client as to whether they qualify for Chapter 7, whether it’s the correct time to file, and which assets will be safe upon filing. An attorney also helps ensure that all the BAPCPA requirements are met so that the process goes smoothly. However, several attorneys who used to offer bankruptcy related services in addition to other practice areas have stopped doing so because of the heightened requirements and the strain it puts on their bandwidth.In case you choose to use an attorney for your Chapter 7 filing, always call in advance to verify that the attorney is still preparing such filings and to check how many years of experience they have had in doing so, in order to confirm that they are knowledgeable enough to make this a smooth process for you.