What Is Consumer Bankruptcy?

Consumer bankruptcy allows people to receive legal forgiveness for at least part of their pre-existing debts. Local branches of the United States Bankruptcy Court work closely with people who just cannot handle their debts as agreed. The most common types of consumer bankruptcy are Chapter 7 and Chapter 13.

Every state is governed by federal bankruptcy laws; most states also have asset exemption laws that allow people to retain at least some of their property regardless of whether they have to file bankruptcy cases.

In 2005, then-President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA.) This law made it much harder to people to file Chapter 7, the only type of bankruptcy that comes close to wiping out pre-existing debts. The provisions of the law made it more appropriate for most working people to file Chapter 13, which partially repays creditors over a three-to-five year period.

To qualify for Chapter 7, you generally must earn less than your state’s annual median income level. Depending upon your state of residence and household size, the figure could run anywhere from $35,505 to $106,707, according to the United States Census Bureau. If your income is higher than the appropriate annual figure, then you can attempt to prove your inability to partially repay creditors through a federally-derived means testing worksheet. If you are deemed ineligible for Chapter 7, you must either forego bankruptcy as an option or file for Chapter 13.

Just asking for Chapter 7 debt relief will harm your credit rating for 10 years from the date you requested bankruptcy. Chapter 13 filings damage your creditworthiness for 7 years. Even if a judge denies your request, your credit reports will still reflect the fact that you asked for bankruptcy help. So be careful before filing any type of paperwork, especially if you do not have legal advice while doing so. More often than not, denied petitions are caused by avoidable paperwork errors.

Consumer bankruptcy is not a resolution for federally-issued student loans. Rare exceptions are granted only in cases of severe and permanent disability, some provable act of fraud or negligence that college officials executed, or the educational institution’s closure.

You cannot include child support, alimony, court fines, recent tax debts, or any type of lawsuit or restitution related to committing any type of crime. If you ran up bills knowing you could not pay them, a judge will likely deny your request to include such debts and could prosecute you for bankruptcy fraud.

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