There are several types of bankruptcy that exist under Federal Law. Each type of bankruptcy is identified by the "chapter" of the bankruptcy code that lays out its rules. I hope to write about each of these "chapters." Chapter 7 seems like the best place to start.
Chapter 7 bankruptcy is commonly referred to as a “straight” or “liquidation” bankruptcy. Of all bankruptcies filed in the United States, Chapter 7 is the most common. In a typical Chapter 7 case, an inventory is taken of the debtor(s)’ assets as of the filing date. This property is considered to be the debtor(s)’ “estate.” Once the estate is established, local (state) law allows for different exemptions to be applied to the property of the estate. An exemption essentially removes equitable value of property from the estate and allows that interest to continue to be vested in the debtor. Any estate property that is not exempt is then liquidated and the proceeds distributed to the debtor(s)’ creditors.
The typical Chapter 7 debtor is an individual or married couple that has low monthly income and moderate to minimal assets. In order to qualify, the debtor’s annual household income must be at or below the median income for a household of their size in the state in which they live. This is commonly referred to as the “means test.” Current figures to establish the median income for Michigan are available on the United State’s Trustee’s website.
In a Chapter 7 bankruptcy, the personal obligation to all of the debtor(s)’ debt is subject to discharge with a couple exceptions. This rule applies to credit cards, medical bills, and even mortgages. Chapter 7, however, does not relieve the debtor(s) of the lien that attaches secured debts to their collateral. For example, a debtor with a mortgage secured by their home would not be liable for their mortgage payment and the mortgage company could not pursue that individual for any money owing on the note. The mortgage company could, however, still foreclose on the property if payments are not made.
If you are considering filing for bankruptcy, please consult the professional advice of a knowledgeable attorney before proceeding.
