bankruptcy

It is true that filing for bankruptcy in a bankruptcy court is a very serious matter and can potentially set one back for a long period of time. The Bankruptcy Code (11 USC 1 et seq.) and the Fair Credit Reporting Act (15 USC 1681 et seq.) state that “a consumer credit report may include information on a Chapter 7 and Chapter 13 bankruptcy for 10 years from the commencement of the case.” However, even if not legally required to do so, consumer credit reporting agencies may prefer to remove bankruptcy information after only 7 years.

In today’s materialistic world where everyone wants the latest tools and gadgets, having a considerable amount of purchasing power is a must. Credit lines offered by financial institutions is one of the methods by which individuals increase their power to purchase goods and services. When the threat of bankruptcy looms over, or when one had filed for bankruptcy in court, one’s ability to avail himself/herself of the opportunities to extend or boost one’s buying power will be greatly restricted.

Lending institutions may not be as keen in giving you a good package, and if they do, it would be in a much higher rate than the normal rate they offer clients with good credit standing. Moreover, the conditions imposed on your credit agreement will be more stringent. Oftentimes, credit institutions would require that you would have demonstrated a clear ability to manage your financial affairs on top of the other additional requirements.

In filing for chapter 13 bankruptcy, there are certain eligibility requirements that have to be met. Only natural persons can file for chapter 13, that is, businesses cannot seek this type of relief. The law requires the debtor to file a plan containing his/ her expected future income and a list of the secured as well as unsecured obligations that the debtor has and this plan will be confirmed by the bankruptcy court.

The debtor may, at any time, modify the plan before confirmation. Once confirmed, “the debtor shall commence making the payments proposed by a plan within 30 days after the plan is filed.” (11 USD 1326) The debtor, in order to qualify for relief under Chapter 13 should have a monthly income of above the state median for six months prior to the filing date. If the amounts of your obligations are too high — secured debts exceeding $922,975 or unsecured debts exceeding $307,675 — you cannot avail of Chapter 13. These amounts are adjusted every three years.

However, the main eligibility requirement of Chapter 7, as delineated in the recently passed amendment to the Bankruptcy Law, “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”,  is that your income should be less than or equal to the state median. If your income is more than the state median, the law requires you to undergo the “means test”. In the means test, your income, after subtracting certain allowed expenses as well as monthly payments for your secured debts, should be less than $100 in order for you to be allowed to file for Chapter 7.

One of the major advantages of filing for relief under Chapter 13 instead of Chapter 7 is that you mitigate or even avert loss of your property. However, some opt for Chapter 7 as the whole proceeding takes only approximately 3 to 6 months as against having to deal with your debt obligations for up to five years when you file under Chapter 13.

After the dust has settled, one should learn from experience and guarantee financial security for one’s self. We should learn to manage our debts and live within our means and always keep in mind that borrowing means that you are discounting your own future.

References

The Bankruptcy Law (11 USC 1 et. seq.)

The Fair Debt Collection Practices Act (42 USC 1692c)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005