Chapter 7 is often referred to as ‘fresh start’ bankruptcy because outstanding debts are discharged through liquidation of non-exempt assets. This bankruptcy option is available to individuals and businesses that meet specific criteria set forth by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Filing Chapter 7 requires assistance from a qualified bankruptcy attorney to ensure compliance with BAPCPA guidelines. It’s important to note that the majority of petitioners are required to file Chapter 13 bankruptcy and establish a plan to pay off outstanding debts.
To determine which bankruptcy chapter is allowed debtors undergo the ‘means’ test which compares their earned income to median income levels in their state of residence. Those who earn more than state income levels are typically required to file a Chapter 13 petition.
The process for filing bankruptcy begins by consulting with a lawyer. Debtors provide extensive financial information including wage earning statements, bank statements, tax returns, credit card debts, secured and unsecured loans, and list of owned assets.
If debtors require copies of previously filed tax returns they need to file a 4506 tax form with the IRS. It can take several weeks to receive tax transcripts, so debtors should submit requests promptly. Bankruptcy approval will not be granted without tax records.
Under BAPCPA regulations, debtors are required to enter into credit counseling through a U.S. Trustee approved agency. Debtors are responsible for the cost of counseling. They must complete programs to obtain a certificate which is provided to the judge before bankruptcy petitions are approved through the court.
Debtors relinquish non-exempt assets to the Trustee who oversees the sale of assets and distributes acquired funds to creditors. Assets used as collateral to secure financing might be returned to the creditor. When debtors want to keep assets they must reaffirm the debt during the initial phase of bankruptcy.
Debtors are allowed to keep assets that are exempt from bankruptcy. Allowable exemptions vary by state, so debtors should consult with their lawyer before filing a schedule of property exemptions. Debtors can review allowed exemptions by state at TheBankruptcySite.org.
When debtors file Chapter 7 an estate is created and becomes the legal owner of all assets owned by debtors. Payments which are due to creditors are paid using non-exempt property held in the estate. Upon discharge of debts ownership of assets that remain in the estate is transferred back to debtors.
On average, the process to settle Chapter 7 lasts 3 to 4 months. Unfortunately, bankruptcy is reflected on credit reports for up to 10 years. Debtors should become proactive in taking steps to rebuild their credit immediately after bankruptcy discharge.
One of the easiest ways to boost credit scores is to pay bills on time and avoid taking on new debts. Another is to keep debt-to-income ratio below 30-percent. For example, if credit card limit is $1,000 strive to keep balances below $300.
Debtors are prohibited from filing bankruptcy for at least 8 years after debts are discharged. If financial problems continue after Chapter 7, debtors have limited resources for obtaining help.
Sources:
www.TheBankruptcySite.org
