Understanding the Basics of Bankruptcy

If you find yourself in financial trouble, unable to pay your outstanding debt, you may be considering filing for bankruptcy. Depending on your situation, bankruptcy could be a good option, a lifeline to help you reset your finances and start again.

The most common form of bankruptcy is called Chapter 7. In 2024, there were 516,759 total bankruptcy filings in the U.S., and roughly 60% of those bankruptcies were Chapter 7.

In this article, we’ll help you understand the basics of bankruptcy by breaking down all the pertinent details you need to know.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often referred to as liquidation bankruptcy. 

The reason why Chapter 7 is so popular, especially among individuals, is that it discharges most of your unsecured debt. This includes credit cards, personal loans, medical bills and more.

It’s also the simplest form of bankruptcy to file and takes the shortest amount of time from start to finish, in most cases.

That being said, there are some requirements that you need to adhere to and meet if you want to receive a discharge of your unsecured debt while also protecting the assets they want to keep — such as your home and vehicles.

Chapter 7 Dismissal vs. Discharge

When initiating bankruptcy proceedings for the first time, it is imperative to grasp the lexicon employed during the procedure. Many individuals often find themselves perplexed by the disparity between “dismissal” and “discharge” within the context of bankruptcy processes.

1. Dismissal of a Bankruptcy Case

Dismissal typically denotes that the court has halted all proceedings within the primary bankruptcy case and any related adversary proceedings, and a discharge order has not been issued. Dismissal can transpire if a debtor voluntarily requests it and meets the criteria for voluntary dismissal.

Alternatively, dismissal can transpire without the debtor’s consent if the court mandates dismissal on its own accord or if a trustee or creditor files a motion for dismissal, which the court subsequently grants.

Dismissals in Chapter 13 vs. Chapter 7

In different bankruptcy chapters, Chapter 13 bankruptcy typically involves higher costs and a lengthier process than Chapter 7 bankruptcy.

In Chapter 13, individuals must craft a repayment plan outlining how to repay a portion of their debt and adhere to this monthly payment plan for three to five years. Consequently, Chapter 13 bankruptcy cases are more susceptible to being dismissed before receiving a discharge.

If a Chapter 13 filer fails to make a payment as stipulated in their repayment plan, it can lead to the dismissal of their case. The most common reason for dismissal in Chapter 13 cases is missing a payment on the repayment plan.

Voluntary Bankruptcy Dismissal

A debtor can submit a request for voluntary dismissal of their bankruptcy case. However, whether the court grants this request depends on various factors, including the specific chapter of bankruptcy filed and the debtor’s previous bankruptcy history.

Restarting a Bankruptcy After Dismissal

You can restart the bankruptcy process if your case is dismissed. To do so, you’ll need to file a Motion to Reinstate. This is a written request submitted to the Bankruptcy Court, asking them to cancel or set aside the dismissal order.

When filing a Motion to Reinstate, explaining how you’ve rectified the deficiency or error that led to the dismissal is essential. Failure to address this issue within the timeframe stipulated by your local court rules may result in the closure of your case.

If your bankruptcy case is closed, you must file a motion to reopen the claim or initiate an entirely new bankruptcy case to proceed.  When initiating a new case within one year of the prior case dismissal, it will require you to file a motion for a stay extension within 30 days of the case filing. This will allow you to keep the bankruptcy in place after the 30 days expire.

Dismissal Without Prejudice

In certain instances, it is feasible to reinstate a bankruptcy shortly after its termination. You can initiate a new bankruptcy filing if a substantial period has elapsed. Generally, courts issue terminations “without prejudice.”

In this context, “without prejudice” signifies that the terminated case does not preclude you from commencing a fresh bankruptcy proceeding. Regrettably, if the termination is “with prejudice,” you may be prohibited from pursuing bankruptcy or compelled to await a prescribed timeframe before resuming bankruptcy proceedings. Cases entailing bankruptcy fraud may not permit debtors to commence a new case.

If you elect not to file bankruptcy again, you must rectify the issues that precipitated the termination before initiating another case. During this interim period, creditors retain the prerogative to communicate with you and institute legal measures to recover the outstanding debt.

2. Bankruptcy Discharge

Typically, the primary objective of commencing bankruptcy proceedings is to effectuate debt discharge. A discharge transpires when the bankruptcy court issues a decree proclaiming that you are no longer legally obligated to reimburse the discharged debt.

After a discharge, most unsecured creditors are precluded from instigating legal actions to reclaim any remaining debt they owe. They are also forbidden from establishing communication via any means, encompassing written correspondence, personal interaction and telephonic contact, about the discharged debt. 

When a creditor violates the discharge by seeking to collect the debt subject to the discharge, you may reopen the bankruptcy case to pursue a motion against the creditor for the discharge violation.  If successful in the motion, the court may grant the debtor punitive damages and attorney fees to deter future creditors from violating the discharge injunction.

Debts Discharged in Bankruptcy Court

Not all kinds of debt can be erased in bankruptcy. Identifying which debts can be forgiven can help you save time and money.

You can request forgiveness by filing bankruptcy for unsecured loans, car accident claims, credit card balances, medical bills, overdue utility payments, lease obligations and personal loans.

Some debts are usually not forgiven in bankruptcy, except in particular situations. These include student loans, child support, alimony payments, certain taxes, fines imposed by the government, debts from fraud, and fines and restitution from criminal activities.

Chapter 7 and Chapter 13 Bankruptcy Payment Obligations

The timing of debt discharge hinges upon the category of bankruptcy under which you have filed. Chapter 7 bankruptcy typically absolves your debts a few months after issuing your bankruptcy decree. Conversely, Chapter 13 bankruptcy cases adhere to a distinct structure.

Under Chapter 13, you partake in a debt reorganization scheme, necessitating partial repayment of your debt through a predetermined installment plan over an extended duration. Upon fulfilling your payment arrangement, any remaining dischargeable debts are then absolved.

The Chapter 7 Bankruptcy Means Test

Before filing for bankruptcy, you must have what’s known as a means test analysis performed, which determines whether your income is low enough to warrant a Chapter 7 bankruptcy filing. This formula is important in determining the type of bankruptcy you are eligible for, but you must also know the exceptions to means test when filing for bankruptcy. 

If you undergo a means test and it’s determined that your income is too high, you may be required to file a Chapter 13 bankruptcy. This is considered a reorganization bankruptcy where you will need to pay a portion of your debts. A Chapter 13 bankruptcy offers various alternatives to restructuring your debt over a three-, four- or five-year period.

If you have high expenses such as car loans, mortgage, daily expenditures and taxes, you may still qualify to file for Chapter 7 bankruptcy even with a high income. 

For those exceeding the median, additional calculations assess disposable income, factoring in allowable expenses and deductions. This meticulous evaluation determines eligibility, ensuring a fair and tailored approach to debt relief.

Find Out if You’re Eligible for Chapter 7 Bankruptcy

To determine your eligibility for Chapter 7 bankruptcy, you can start by gathering information on your monthly income, expenses and debts. Utilize means test forms and calculators available online, which often follow the criteria outlined in the bankruptcy code.

Alternatively, consult with an experienced bankruptcy attorney who can provide personalized guidance based on your financial situation. They can help you navigate the complexities of the means test, assess your eligibility and offer insights into the best course of action for your specific circumstances. Remember, seeking professional advice is crucial to ensuring accuracy and understanding the nuances of your eligibility for Chapter 7 bankruptcy.

What Information is Needed for a Bankruptcy Means Test?

For a bankruptcy means test, specific information is required to assess eligibility for relief. Essential details include:

1. Income Data: Accurate documentation of all income sources, including wages, rental income and any other financial resources, is crucial. The debtor’s average monthly income over a six-month period is a key factor in determining eligibility.
2. Expense Documentation: Detailed records of monthly living expenses such as rent or mortgage payments, utilities, food, transportation and healthcare costs are necessary. The means test considers allowable expenses to calculate disposable income.
3. Debt Information: A comprehensive list of all debts, categorized as consumer or business debts, is essential. This includes credit card balances, medical bills, car loans and other financial obligations.
4. Family Size: The number of individuals in the debtor’s household influences the means test calculation, as it impacts the state’s median income threshold.
5. Special Circumstances: Any exceptional circumstances affecting the debtor’s financial situation, such as disability or military service, should be documented. Special circumstances may influence the means test results.

Gathering this information is a critical step in the bankruptcy process, facilitating a thorough means test assessment and ensuring accurate eligibility determination for Chapter 7 bankruptcy relief.

 

Passing the Means Test

In most cases, you must pass the “means test” to qualify for Chapter 7 bankruptcy. However, filing for bankruptcy doesn’t have to be a nightmare because there are simple things to be considered before you can qualify. They include:

1. Average Monthly Income

The means test will compare your average monthly income with the median income of a household similar to yours. This is done for six months prior to filing bankruptcy. If your income is below the average income per household, you will qualify to file a Chapter 7 bankruptcy.

The average income per household varies from state to state. Hence, the means test must put your state in mind when doing the calculations.

It’s also important to determine the relevant time period for calculating income. This typically involves looking at the debtor’s average monthly income over the six months preceding the bankruptcy filing. The income during this period is used to assess whether it falls below the state’s median income for a household of the same size.

This initial phase sets the foundation for the means test calculation, guiding the subsequent evaluation of income and allowable expenses to ascertain eligibility for Chapter 7 bankruptcy relief. By establishing the relevant timeframe, the means test ensures a comprehensive and standardized approach in evaluating a debtor’s financial situation.

2. Expenses Against Income

It is not the end of the game for you if your income exceeds the average monthly income per household. You can still qualify to file for a Chapter 7 bankruptcy by meeting additional requirements.

The next step is the balancing stage that weighs your total income versus your expenses. If all your expenses versus your income amount to little or no disposable income, you will be allowed to file a Chapter 7 bankruptcy.

Every city, state, county or metropolitan region has its allowed amounts of expense categories. Some of these include all the necessities, transportation and housing. Any expenses considered to be luxury will not be used in the means test. 

If your total expenses are still less than your average income, you may not qualify to file for Chapter 7 bankruptcy. This presumes you still have some disposable income, which you can use to pay your debts. However, this presumption may be rebutted in certain circumstances to allow you to still qualify for Chapter 7 bankruptcy.

Are There Other Requirements for Chapter 7 Bankruptcy?

Passing the means test is the first step in determining eligibility for Chapter 7 bankruptcy. Once you do that, there are two other things that are taken into consideration.

Prior Bankruptcies

If you’ve filed for Chapter 7 bankruptcy before and received a debt discharge, you need to wait eight years from your prior case filing before filing another bankruptcy.

However, if you filed before and did not finish the case or did not receive a discharge, you’re allowed to file for a Chapter 7 bankruptcy anytime. Of course, you must still pass the means test for the second filing.

If you filed a Chapter 7 bankruptcy, failed the means test but received a discharge under Chapter 13 bankruptcy, you need to wait for at least six years from your prior case filing before filing for a Chapter 7.

If you filed for Chapter 13 bankruptcy but did not complete the case or failed to get a discharge, you can file for Chapter 7 bankruptcy anytime.

Pre-bankruptcy Credit Counseling

Filing for bankruptcy can be a tiring and stressful process that can put you through tremendous pressure if you’re not careful. This is why it is a requirement that you go through a pre-bankruptcy credit counseling course at least six months before the bankruptcy filing. 

The course is provided by an approved agency, which will give you a certificate after completion of the course, which is only valid for six months. You must produce this pre-bankruptcy credit counseling certificate in court when filing for bankruptcy.

If You Qualify for Chapter 7 Bankruptcy

Things don’t end at Chapter 7 qualifications. Filing for any bankruptcy that is fit for you is a long process that involves a lot of analysis and review of your paperwork. Completing everything and obtaining a final discharge can take up to four months.

The first thing you need to do is file a petition with your designated bankruptcy court. You will need to file various bankruptcy pleadings, which detail your income, expenses, assets, liabilities and overall financial standing.

Second, you must be prepared to spend some money, including paying an attorney, credit counseling and payment for petition filing. You must also be prepared for potential loss of privacy and financial control.

If You Don’t Qualify for Chapter 7 Bankruptcy

All hope is not lost if you don’t qualify for Chapter 7 bankruptcy. You can still file Chapter 13 bankruptcy. This bankruptcy will require you to make monthly payments for a period of three to five years. This payment will undergo a strict budget, which is monitored by the court.

Chapter 13 bankruptcy is still not a bad idea because it will still help you handle some debts that will not go away in Chapter 7, and Chapter 13 has the ability to restructure vehicle payments, mortgages and property taxes to stop repossessions and foreclosures.

Alternatives to Chapter 7: Debt Settlement or Debt Relief

When facing financial challenges, individuals often consider options such as debt settlement or debt relief to alleviate their burden. 

Debt settlement involves negotiating with creditors to settle debts for less than the total amount owed, offering a potential reduction in the overall debt. On the other hand, debt relief encompasses a broader range of strategies aimed at managing or reducing debt, including debt consolidation, debt management plans or, in more severe cases, bankruptcy.

Navigating the complexities of debt settlement or debt relief requires careful consideration of one’s financial situation and goals. Consulting with our experienced team at Babi Legal can provide personalized insights and guidance, helping you make informed decisions tailored to your unique circumstances. 

Whether exploring settlement negotiations or pursuing a comprehensive debt relief strategy, our team is dedicated to assisting clients on their journey to financial recovery.

Closing of a Bankruptcy Case

Closure signifies the conclusion of all activities associated with the main bankruptcy case. This encompasses the resolution of all motions and submitting a statement indicating the fulfillment of all trustee responsibilities if a trustee was appointed.

However, closure does not inherently imply that a discharge has been granted unless all procedures connected to determining eligibility for discharge have been finalized.

If a bankruptcy case is closed without a discharge, typically due to an individual debtor’s failure to timely submit a Certificate of Completion of Instructional Course Concerning Personal Financial Management, the debtor must file a Motion to Reopen the Case.

Additionally, a bankruptcy case may receive a discharge, but the case can remain open for various reasons, such as the Chapter 7 Trustee seeking to liquidate bankruptcy estate assets post-discharge.

Hire an Experienced Bankruptcy Attorney

Given the intricacies associated with bankruptcy cases, securing legal representation is paramount. With a proficient legal advocate at your side, you can preemptively evade terminations, as they can deftly navigate each phase of the bankruptcy filing procedure on your behalf, mitigating the common errors individuals often commit while embarking on the bankruptcy journey.

At Babi Legal, our team of expert attorneys has more than 10 years of experience in bankruptcy, debt collection and debt settlement law. Learn more by contacting us today.