Is bankruptcy for you?

Is bankruptcy for you?

Our legal system recognizes the need for a fresh start, making debtor’s prison unconstitutional. Yet many people find themselves financially indebted so much that it can feel like they are trapped. While there are many avenues to repaying debt, working with a financial planner, credit counselor, and other trusted financial advisors, the likelihood of repayment for some people may be too unlikely, overly burdensome, and unnecessarily hard. 

The Bankruptcy Code has several chapters where individuals, companies, and other organizations may avail themselves of a fresh start. For purposes of this article, the focus is on individual filings under Chapter 7 of the Bankruptcy Code. Chapter 7 of the Bankruptcy Code may put an automatic stop or stay to any collection activity against an individual, and ultimately may result in totally discharging an individual’s debt (with some exceptions). 

Common exceptions to discharge include: tax (within certain periods of time), fraudulent activity by way of consumer debt, false misrepresentation, false pretense, or actual fraud, a domestic support obligation, such as child support, alimony, and/or other relief to a spouse in a divorce, fines or penalties to a governmental unit, personal injury liability for death or damage committed unlawfully as a result of alcohol, as well as certain money owed to a pension, profit-sharing, or stock bonus plan, to name a few. For a more complete list, please see 11 USCS § 523 of the United State Bankruptcy Code. 

If you are under severe financial distress, you may want to consider if you are eligible for a Chapter 7 Bankruptcy. 

Individuals first must be financially at or below a median income to be considered an eligible candidate for Chapter 7 bankruptcy. According to Census Bureau Median Family Income by Family Size, at https://www.justice.gov/ust/eo/bapcpa/20201101/bci_data/median_income_table.htm for an individual in the State of New Jersey for 2021, the median income is $71,064. Meaning that single family households earning more than the median income cannot qualify under Chapter 7 bankruptcy, and the case may be converted to a Chapter 13 case. 

Before filing for Bankruptcy, an individual must ensure that they are current on filing their federal income tax returns. An individual debtor must provide copies of their most recent federal tax returns or transcripts. 

Individuals who seek to file Bankruptcy must take a credit counseling course prior to filing their Bankruptcy petition. During the Bankruptcy proceedings the individual must provide updates as to the completion of the Credit Counseling. In addition to credit counseling, the debtor must complete a personal finance course on debtor education. The entire purpose of Bankruptcy is to provide a fresh start, to give people an opportunity to move on from stressful, severe financial circumstances. Often, individuals find themselves in financial distress because of bad habits, which credit counseling and personal finance education help to prevent. While it is possible to file for bankruptcy more than once, it is our hope that the individual in need will never have to file again. 

Individuals who have filed for bankruptcy under Chapter 7 in the last eight years are not eligible to file for bankruptcy. The eight years is measured from the time of filing. With the spirit of finality in mind, when considering bankruptcy, make sure to have a clear plan before filing and for life after filing. Please have a clear understanding of what debts are eligible for discharge and what debts are ineligible for discharge, like taxes, child support (or domestic obligations), or student loans. Only after careful consideration of what debts may be discharged, your median household income, compliance with federal income taxes, a willingness to complete credit counseling, and a personal finance course, should an individual file for bankruptcy. 

If you or someone you know is considering filing for bankruptcy, please fee free to contact us for a free consultation.