Personal Bankruptcy Laws For Dummies
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The founders of the United States foresaw that honest people might suffer severe economic misfortune or make poor choices. So, they provided for bankruptcy in the U.S. Constitution.

Personal bankruptcies are covered mainly under two parts of the U.S. Bankruptcy Code:

  • Chapter 7 liquidation: Chapter 7, commonly referred to as straight bankruptcy, is often what people mean or think of when they use or hear the term generically.

    In its simplest form, Chapter 7 wipes out most of your debts and, in return, you may have to surrender some of your property. Chapter 7 doesn’t include a repayment plan. Your debts are simply eliminated forever.

    If you buy a lottery ticket the day after filing and hit the jackpot, yippee! for you and tough beans for your creditors. Most property you receive after filing Chapter 7 doesn’t become part of your bankruptcy, but there are a few exceptions. Income tax refunds for prebankruptcy tax years go to pay your debts as well as divorce property awards, inheritances, and life insurance that you become entitled to receive within 180 days of bankruptcy.

    Theoretically, a debtor’s assets can be seized and sold for the benefit of creditors. All nonexempt assets owned on the petition date are fair game. But in practice, 96 percent of consumer bankruptcies are no-asset cases, meaning that no property is taken away from the debtor because it’s all exempt or worth so little that it’s not worth the trouble.

    To qualify for Chapter 7, if you earn more than the median income for your state, you’ll have to pass a new Means Test. Although the test is terrifically complicated, just about everyone can pass. The toughest part is just assembling the information you have to provide.

  • Chapter 13 reorganization: Chapter 13 involves a repayment plan in which you pay all or part of your debts during a three- to five-year period. In a Chapter 13, you propose a debt repayment plan that requires court approval and thereafter keeps creditors at bay as long as you keep making payments

    A budget plan that demands frugality to the point of misery is doomed to fail. One that is reasonable has a good chance of succeeding.

    Every Chapter 13 plan must pass two tests:

    • The best-interest test, which mandates that unsecured creditors be paid at least as much as they would receive if you filed a Chapter 7 instead of a Chapter 13.

    • The best-efforts test, which requires that you pay all your disposable income (the amount left over after paying reasonable living expenses) to the trustee for at least the first 36 months of your plan.

      If your monthly income is more than the median for your state, allowable expenses will be based on Internal Revenue Collection Financial Standards, and the plan must run for five years. Otherwise, the amount of your payment will be based on your actual expenses, so long as they are reasonable.

When you’re done, you’re done. Most creditors have gotten all they’re going to get. Life goes on.

Other special kinds of bankruptcy exist. Chapter 11 bankruptcy is available to individuals but primarily is used for large business reorganizations. Chapter 12 bankruptcy, which is similar to Chapter 13 bankruptcy, addresses the unique problems faced by family farmers and family fishermen. As a practical matter, almost all consumer cases are covered under Chapter 7 or Chapter 13 of the code.

About This Article

This article is from the book:

About the book authors:

James P. Caher, a practicing attorney with 30 years of experience, is a nationally recognized expert on consumer bankruptcies and authority on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Jim coauthored, with his brother John, Debt Free! Your Guide to Personal Bankruptcy Without Shame (Henry Holt, 1996) and two highly regarded books for lawyers: Discharging Marital Obligations in Bankruptcy (LRP, 1997) and Discharging Credit Card Debts in Bankruptcy (LRP, 1998).
In addition, Jim has published scores of articles for bankruptcy professionals and is frequently called upon to analyze and interpret the complicated provisions of the 2005 bankruptcy law. He was labeled the “online guru” by a national legal weekly because of his regular appearances on the Internet as an expert analyst on bankruptcy law. Jim also serves on the editorial board of the American Bankruptcy Institute.
Jim graduated from Niagara University and then earned his law degree from Memphis State University Law School, where he was a member of the Law Review and recipient of the American Jurisprudence Award for Excellence in the field of debtor-creditor relations. He filed his first consumer bankruptcy case shortly after graduating in 1975. Jim lives and practices in Eugene, Oregon.

John M. Caher is a legal journalist who has written about law and the courts for most of his 25-year career.
Currently the Albany bureau chief for the New York Law Journal, John previously was state editor and legal affairs reporter for the Times Union of Albany, New York. His legal reportage has won more than two dozen awards, including prestigious honors from the American Bar Association, the New York State Bar Association, the Erie County Bar Association, and the Associated Press.
John coauthored, with his brother Jim, Debt Free! Your Guide to Personal Bankruptcy Without Shame (Henry Holt, 1996). He is the author of King of the Mountain: The Rise, Fall and Redemption of Chief Judge Sol Wachtler (Prometheus Books, 1998). In addition, John was the principal writer assisting former U.S. Treasury Secretary William E. Simon in preparation of his memoirs. Mr. Simon’s autobiography, A Time for Reflection, was published in 2003 by Regnery.
John is a 1980 graduate of Utica College of Syracuse University, where he received his bachelor’s degree in journalism, and a 1993 graduate of Rensselaer Polytechnic Institute, where he earned a master’s degree in technical communications/graphics. John lives in Clifton Park, New York.

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