Consumer Bankruptcy is called such because the bankruptcy mostly stems from expenditures related to family, personal, and household expenses. Simply put, consumer bankruptcy is the option of the individual taxpayer who wants to discharge their debt.
Why Consumer Bankruptcy?
The opposite of consumer bankruptcy is non-consumer bankruptcy which is linked to business debts. It’s crucial to make a distinction between the two because the guidelines for Consumer Bankruptcy approval are very different from Non-Consumer Bankruptcy. In order to qualify, you have to go through the Means Test to determine whether your financial situation is dire and requires the intervention of the law.
Two Types of Consumer Bankruptcy
As mentioned, there are two types of Consumer Bankruptcy: Chapter 7 and Chapter 13. Chapter 7 is essentially a complete bankruptcy discharge wherein petitioners are made to sell off their assets and use this to pay any outstanding debts. A Chapter 13 Bankruptcy is more like a repayment plan wherein some assets are sold for paying liabilities and a portion of the monthly income is allocated to creditors. The Means Test is responsible for determining whether you meet the requirements of Chapter 7 or Chapter 13.
Note that under both Chapters are varying exemptions. For example, there are some items that are exempt from being sold to pay off debts. On the other end of the spectrum, there are also debts that cannot be discharged even if the petition is approved.
Restrictions to Personal Bankruptcy
Not everyone can file for personal bankruptcy. For example, if your income is too high or if it was determined that you can pay off your debts without the benefit of bankruptcy, then the court will deny your petition. Other restrictions include being granted discharged in a previous bankruptcy case spanning 8 (Chapter 7) or 6 (Chapter 13) years ago. If you filed a petition within the last 180 days and this was denied, then you can’t file another one until the prohibited period has lapsed. Defrauding creditors and failure to meet some requirements also invalidates you from obtaining Bankruptcy.
Effects of Bankruptcy Petition and Discharge
Upon submitting a bankruptcy petition, individuals get an “automatic stay” from creditors. This basically means that the creditors are no longer allowed to call or pester debtors about their outstanding debts. Once the petition is filed, the law steps in with an implicit agreement that the liabilities will be paid off through a systematic process. This gives the petitioner a chance to regroup and stop stressing about repetitive phone calls and reminders.
There’s actually a long process between filing the petition and obtaining approval from the courts. A thorough study of your circumstances will be made to ensure that a bankruptcy petition and discharge is your ONLY remedy to the financial impediment. Once this has been proven beyond doubt, a discharge may be granted by the courts.
The discharge is administered by a trustee who takes care of the funds and disburses them to the proper creditors following a strict payment schedule. Under Chapter 7 Bankruptcy, after all assets have been sold and the proceeds paid to the creditors, any remaining liabilities are written off.