Personal Bankruptcy Law Primer

Federal bankruptcy rules are in Title 11 of the U.S. Code and are designed to give you the opportunity for a “fresh start” after a period of personal financial disaster. This is not a U.S.-only concept. If you have a European residency, you are also permitted to file for bankruptcy protection (although the rules are a bit different).

Bankruptcy laws are not a modern idea as the issue is mentioned throughout history, going back as far as ancient Hebrew texts. As an individual, you have two primary options for protection whether you live in California, Florida, Michigan, or any other state. U.S. bankruptcy laws are federal and apply to every state. You can file under Chapter 7, in which you ask the court to erase all debts included in your filing documents. In return, you agree to turn over the majority of your assets to the court. They will convert these items into cash and pay your creditors as much and as fairly as possible.

Depending on where you live, both your state and federal laws allow some “exemptions”, which are items you own that you may keep. Your second choice is filing under Chapter 13, called a “wage earner plan.” In this instance, you are telling the court that you have consistent income, but it is not enough to make the regular payments on your debts. You are asking the court to arrange a modified, lower payment schedule, but not to fully erase your debts. Your bankruptcy lawyers will help you decide which option is best for you .

Recent Bankruptcy Law Changes

For the first time in over 25 years, U.S. bankruptcy law reform was passed by Congress in 2005. The changes may affect you just a bit or in a major way depending on your personal financial situation. While there are a number of procedural changes, the most important involve credit counseling and a “means test”, which determines whether you can file either Chapter 7 or Chapter 13 actions, or whether you might be allowed to file Chapter 13 only. You are also now required to complete a credit counseling course within six months of filing bankruptcy, which is intended to help you understand how credit works with the hope that you won’t find yourself in this situation in the future. The bankruptcy law changes could affect you, so work closely with your attorney to decide how to proceed.

How Bankruptcy Law Reform Might Affect You

Bankruptcy law reform took effect in October 2005, and may or may not affect you. If your income is less than or more than the “median income” in your state of residence, your bankruptcy filing options may be affected. If your regular, verifiable income is more than your state’s median, you may be allowed to file Chapter 13 (wage earner plan) only. However, if your regular monthly income is less than your state’s median income, you will still be permitted to file either Chapter 7 or Chapter 13 petitions. Your bankruptcy lawyers will help you compute the necessary information to substantiate your situation. You will, however, in either instance, have to take a credit counseling course, prior to your bankruptcy filing. While some have criticized this new requirement, you might receive some good information about credit management after one of these courses. You need to show evidence you have completed one of these sessions to file a successful bankruptcy petition.