Do You Qualify for Chapter 7 Under New Bankruptcy Laws?

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Chapter 7 has long been a preferred debt relief option because this bankruptcy chapter allows debtors to have most debts discharged without restitution. However, in 2005 new bankruptcy laws took effect which has made it considerably more difficult to qualify.

Today, Chapter 7 is typically only available to petitioners earning less than their states' median income or those with special circumstances determined by the court. There are instances when debtors file Chapter 13 and cannot comply with their payment plan. Depending on the reason petitioners fail out of bankruptcy, the courts can transfer Chapter 13 to Chapter 7.

Petitioners should take time to become familiar with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The vast majority of petitioners are required to file Chapter 13 bankruptcy and establish creditor payment plans which are supervised through the court.

The best way to determine if debtors qualify for Chapter 7 is by obtaining legal counsel. While individuals can file bankruptcy without a lawyer, the process is daunting and few people possess the wherewithal to comply with BAPCPA guidelines.

Debtors with low income earnings may qualify for pro bono services through the American Bar Association. Their website publishes a national list of bankruptcy attorneys offering pro bono and discounted services to those who qualify.

When possible, it is best to consult with three or more lawyers to determine which is best suited. Debtors often spend considerable time with their lawyer throughout the bankruptcy process. It is beneficial to work with lawyers whose personalities are compatible with debtors.

When arranging consultation appointments it is a good idea to request a list of required information.  BAPCPA guidelines require lawyers to review and validate all reported income and expenses and provide a letter of certification to the court. Debtors must avoid understating income or overstating expenses; otherwise, their attorney may refuse to work with them.

Bankruptcy lawyers normally require multiple financial records including: wage earning statements or profit and loss statements for sole proprietors; checking, savings, and financial portfolio statements; property titles; two years' personal tax returns; life insurance policies; secured loan contracts; credit card statements; and court ordered payments such as spousal alimony or child support.

Once Chapter 7 authorization is granted an estate is established. Debtors turn over non-exempt assets to the bankruptcy Trustee who liquidates property and distributes funds to creditors that submitted claims against the estate. Upon bankruptcy discharge ownership of remaining assets transfers back to debtors.

Petitioners are allowed to reaffirm debts by entering into payment arrangements with creditors. Payment plans must be confirmed through the court. If debtors are non-compliant with payment plans, creditors can petition courts seeking dismissal of bankruptcy petitions.

The average duration of Chapter 7 is four months; however, bankruptcy remains on credit reports for as long as 10 years. BAPCPA prohibits debtors from seeking debt help via bankruptcy for 8 years from the date of discharge. Therefore, it is crucial for debtors stay out of debt and stay in control of personal finances.
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