Understanding Personal Bankruptcy: Types, Eligibility, and Consequences

Bankruptcy is often viewed with trepidation, seen as a last resort for those struggling with insurmountable debt. Yet, for many, it offers a legal pathway to a fresh financial start. If you're considering filing for bankruptcy, it's crucial to understand the different types available, their implications, and the advantages and drawbacks of each. 

Types of Personal Bankruptcy

• Chapter 7 (Liquidation Bankruptcy): This form of bankruptcy involves the sale of a debtor's non-exempt assets by a trustee. The proceeds are then distributed to creditors.

• Chapter 13 (Reorganization Bankruptcy): Under this approach, debtors propose a plan to repay their debts over a period of three to five years.

Personal Bankruptcy Eligibility Rules

Chapter 7 Requirements

• Means Test: This test examines your financial means to determine if they fall below your state's median. If they do, you're eligible. If they're above, additional financial assessments determine eligibility. 

• Credit Counseling: Before filing, you must undergo credit counseling from an approved agency. 

• Previous Bankruptcies: Filers cannot have had a bankruptcy petition dismissed in the prior 180 days. 

Chapter 13 Requirements

• Debt Limits: Your unsecured debts must be below $394,725, and secured debts must be under $1,184,200 (as of 2022, but these figures are adjusted periodically). 

• Regular Income: You must have a steady income source. 

• Tax Filings: All tax returns for the last four years should be filed. 

Debts that Can and Cannot Be Discharged

Dischargeable Debts

Bankruptcy can provide relief from various burdens, including credit card debts, medical bills, and personal loans. This can offer a significant financial reset, allowing individuals to move forward without the weight of these unsecured debts. Additionally, some older tax debts might also be eligible for discharge under Chapter 7 bankruptcy. 

Non-Dischargeable Debts

Certain debts cannot be erased through bankruptcy. This includes student loans (with few exceptions), alimony and child support payments meant to financially support dependents, specific tax debts arising from fraud or willful neglect, and debts incurred due to personal injury caused by driving under the influence (DUI). Understanding these non-dischargeable debts is crucial when considering bankruptcy as a financial solution. 

Weighing Your Options

Chapter 7 Pros and Cons

One of the more appealing aspects of this chapter is that it offers a relatively fast-paced route (usually 3-6 months) toward eliminating most unsecured debts like credit card bills and medical expenses. The court orders the liquidation of non-exempt assets (those not protected by law) to partially satisfy outstanding debts.

A significant downside of Chapter 7 is the negative impact on your credit score. This can make it challenging to obtain new loans or lines of credit for several years. Additionally, you might be required to surrender certain non-exempt assets to repay creditors.

Chapter 13 Pros and Cons

An attractive aspect of declaring Chapter 13 is that, unlike Chapter 7, this type of personal bankruptcy allows you to retain your property while you create a debt repayment plan approved by the court. This plan typically lasts for 3-5 years. This option can be beneficial if you have assets you wish to keep or have fallen behind on secured debts like car payments or mortgages and want to catch up.

On the flip side, this option has two primary drawbacks. Firstly, Chapter 13 involves a longer and more complex process compared to Chapter 7. Consequently, legal fees associated with Chapter 13 are also generally higher.

Consequences of Filing for Bankruptcy

While bankruptcy can provide relief from overwhelming debt, it comes with significant drawbacks. Your credit score will likely plummet and stay blemished for 7-10 years, making obtaining new credit or loans difficult. Chapter 7 bankruptcy might also result in the loss of some assets. 

Furthermore, a social stigma can sometimes be associated with filing for bankruptcy. While this consequence is slightly more vague, the social consequences of a bankruptcy filing can be challenging, depending on your circumstances. 

Know the Laws with LegalFix

Filing for bankruptcy is a significant decision with lasting consequences. However, it can also provide relief and a path to rebuilding for those drowning in debt. Given the complexities involved, having access to affordable legal counsel in your state can be invaluable. An attorney can guide you through the nuances of personal bankruptcy, ensuring that you make the most informed choice for your financial future.

Whether you want to know about personal bankruptcy or just want a better understanding of how our legal system works, LegalFix is your go-to source for free legal information. You can find helpful articles and state-specific explanations of nearly 1,600 legal topics and browse the state and federal statutes to better understand the laws that affect you. Just visit LegalFix.com to find all this content—and check back often for more valuable legal products and services coming soon.