Bankruptcy procedures in the U.S. are governed by the Federal Bankruptcy Code which lists down different types of bankruptcy. Each type of bankruptcy is sorted into different bankruptcy chapters and is also named by that bankruptcy chapter. There are two main types of bankruptcy for personal bankruptcy cases: Chapter 7 and Chapter 13.
Chapter 7 is called liquidation bankruptcy because it is in this type that assets are liquidated to pay off as much of a person’s debt as possible, with the remaining debt being discharged. On the other hand, Chapter 13 does not involve any liquidation or discharging, it is simply a restructuring of a person’s acquired debt into a repayment plan that he can pay off in the next 3-5 years. It’s for this reason that Chapter 13s are also known as the wage earner’s plan.
If you want to know how to file a Chapter 7 bankruptcy, read on, or better yet, consult with one of our Towson, Maryland bankruptcy attorneys at The Grafton Firm. We will help you figure out what chapter of bankruptcy is best for you, and we’ll help you through the process of filing as well.
1. Credit Counselling
The first step to filing bankruptcy is to take credit counseling courses. This is the same for all types of bankruptcy, so even before you can determine what type of bankruptcy you’ll be filing, you can already take credit counseling sessions.
You must take credit counseling sessions conducted by agencies approved by the U.S. Trustee Program and these must be taken not earlier than 6 months before filing.
2. Checking Eligibility
The next step is to check for eligibility to file for a Chapter 7. Bankruptcy law automatically qualifies the following to file for a Chapter 7 bankruptcy:
- Individuals who own a business and whose debts have mostly been acquired from running the business,
- Disabled veterans that made most of their debt while serving in homeland defense or active duty,
- Individuals whose total household income is below the state median.
Maryland State’s median income for 2021 is:
To compare, you must compute the average monthly income your household had for the past six months. Income includes paying checks, financial aid, alimony, child support, etc. Then, you compare it with the table above. If your household’s income is less than the state median’s, you are automatically qualified to file a chapter 7, if not, you can proceed to the means test computation.
The goal of the means test computation is to evaluate your income and expenses and try to see if you have enough leftover money to pay for your debts. In other words, it tries to see if you could afford to file a Chapter 13 instead.
For this, you once again take your household income and subtract the following:
1. IRS-Established expenses
The IRS sets allowances for necessary expenses including groceries, transportation costs, utilities, etc. These are set amounts, not the amount that you spend on these things.
2. Actual expenses
Here is where you subtract expenses that go over the allowance that the IRS sets.
3. Payment to secured and priority creditors
Secured debt is debt that is bound to collateral. These have to be paid for first because even if you file for bankruptcy, the collateral can still be taken from you by creditors.
On the other hand, priority debt is those that often carry hefty consequences if not paid for including tax debts.
4. Administrative expenses
In administrative expenses, you subtract the expenses you would incur if you file for a Chapter 13. This is to see if you can afford to file a Chapter 13 as opposed to a Chapter 7.
Once you subtract these expenses, you then evaluate the remaining cash. If it is below 25% of your remaining debt, you will be allowed to file for a Chapter 7. If the remaining amount is more than 25%, you will have to file a Chapter 13 and create a repayment plan for those debts.
3. Compiling and Filing Bankruptcy Forms
Once you have determined that you are eligible to file for a Chapter 7, it is time to fill out your bankruptcy forms. The requirements may vary per state so it is important to ask your local bankruptcy court. In general, however, these forms consist of a means test form, finance form, and a bankruptcy petition.
Once you have filled out these forms, you may then go to your local bankruptcy court and file them. This officially starts your bankruptcy case and puts you under an automatic stay, which is a form of bankruptcy protection that prohibits your loaners from making collections from you.
It is also recommended that you get a local bankruptcy lawyer to help you with compiling documents because he will know the bankruptcy laws and forms that are necessary at your specific locality. The Grafton Firm is a Towson, Maryland bankruptcy law firm committed to serving Maryland residents.
4. Meeting with your Bankruptcy Trustee
Another thing that happens when you file your forms is a bankruptcy trustee being assigned to you by the court. Your bankruptcy trustee will be responsible for facilitating your bankruptcy case, so you will need to show your trustee the necessary documents including your paycheck stubs, tax returns, and bank statements.
He will also be in charge of evaluating your assets as exempt and non-exempt. Exempt assets are items necessary for making a living including a simple car, your home, your clothes, and the like. These will be protected and will not be taken from you.
On the other hand, non-exempt assets are nonessentials, especially expensive items like extra properties. These will be liquidated and used to repay your debt, starting with your secured debt then your unsecured debt.
Ideally, your liquidated assets should be able to pay for your secured debt. If not, you will have to tell the court how you intend to settle those debts which can include continuing payment or returning the collateral.
5. Taking a Debtor Education Course
Once those steps are over, you will have to take a debtor education course which is similar to the credit counseling course. In this course, you will be taught how to rebuild your credit and how to better manage your money.
6. Getting your Discharge
And that’s it! Once you have completed steps 1 through 5, you will have gone through the process of filing bankruptcy and will have your outstanding debt discharged! At this point, most, if not all, of your debt will have been absolved. Do take note however that not all debt is dischargeable like student debt.
Also remember that at this point, you no longer have to pay back a debt that has been discharged and that no lender can come after you for anything that you once owned.
We at The Grafton Firm know that filing for bankruptcy is no small matter and that the bankruptcy process itself can be very confusing. This is why we are committed to helping you through bankruptcy filing to give you a fresh start. Don’t hesitate to contact a Towson Maryland bankruptcy attorney today!