Christopher Kerney,
Attorney at Law

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The basics of Chapter 7 bankruptcy

| Mar 25, 2021 | Bankruptcy, Blog |

Sometimes, debt becomes overwhelming, and Tennessee consumers need a way out. People who see no alternative may file bankruptcy to discharge certain debts. However, they must file the petition to start the process and meet certain criteria to qualify.

How Chapter 7 bankruptcy works

Chapter 7 liquidates a debtor’s non-exempt assets and converts them to cash to pay creditors through a trustee. The debtor must list all of their assets, debts, and income sources on the petition and attach proof of income such as pay stubs. Some non-exempt assets include second homes, second vehicles with sufficient equity, valuable heirlooms and collections, and jewelry.

A debtor can only discharge exempt unsecured debts in bankruptcy, which include past due utilities, medical debt, and credit card debt. The debtor commonly gets a discharge in three to four months, and they no longer owe the debt, even for debt partially paid.

Qualifications

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act to make high-income earners responsible for their debt. Certain retirement assets got protection from bankruptcy for the first time. However, the new law requires the debtor to pass a two-step means test.

The court compares the debtor’s income of the last six months to the median income of a same size household. If they fall below the threshold, they qualify, or the court figures their disposable income. If the debtor has less than $136 of disposable income, they pass the test.

Debtors who fail the test may still qualify under special circumstances, such as military exemptions. The new law also requires debtors to take court-approved credit counseling 180 days before filing.

Debtors who are honest and complete requirements according to bankruptcy law can get debt relief. However, bankruptcy doesn’t come without repercussions, so a debtor should seek legal advice.