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Can I File Bankruptcy If I Can’t Pay My Bills?

Updated on June 20, 2013

In debt and don't know what to do?

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When Should You File Bankruptcy?

First, bankruptcy should be a last resort. It should not be used as a financial planning tool to get rid of debt or stop creditors from harassing you. In the past, some people used bankruptcy for those very reasons until the laws were changed in 2005. When you file bankruptcy, any lawsuits, collection procedures, and all pressing creditors must cease contacting you and no action can be filed against you. If you have exhausted all your options to fix your credit problems, then bankruptcy might be a viable solution, if you qualify.

There are two main types of bankruptcy that consumers might be able to file, Chapter 7 and Chapter 13. This post discusses Chapter 7, which is straight bankruptcy that seeks to liquidate all your debt, Chapter 13 does not liquidate your debt I’ll talk more about Chapter 13 in a later hub.

Chapter 7 can be a fresh start for people struggling to pay their bills and want to get their financial life back on track. Accordingly, anyone that files Chapter 7 must undergo credit counseling. Used wisely, it can be helpful in aiding people to avoid credit problems in the future.

Maybe Chapter 7 is the Answer You've Been Praying For?

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About Filing Chapter 7 Bankruptcy

Chapter 7 can be a fresh start for people struggling to pay their bills and want to get their financial life back on track. Accordingly, anyone that files Chapter 7 must undergo credit counseling. Used wisely, it can be helpful in aiding people to avoid credit problems in the future.

What does Chapter 7 do?

Chapter 7 liquidates a debtor’s non-exempt assets which mean a debtor’s non-exempt assets will be sold by the court. Some examples of non-exempt assets include family heirlooms second or vacation homes, second cars, bank accounts, stock bonds and other investments.

Proceeds from the sale of the non-exempt assets are turned over to the debtor’s creditors by an appointee or trustee of the court. The trustee distributes all of the debtor’s assets to the creditors based on a Pro-Rata basis. This divides the money proportionately among the creditors, according to the amount of debt that each creditor holds. Almost all unsecured debt can be discharged in a Chapter 7 filing as long as the majority of it has been for personal, family, or household use.

You Must Qualify To File

Who can file Chapter 7?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 regulates who can apply for Chapter 7 bankruptcy. Under this law, people eligible to file for bankruptcy under Chapter 7 must earn less than the median income in their state. If they earn more than the median income in their state, then they will only be allowed to file for bankruptcy if they pass a means test.

What is a Means Test?

Your state will apply a means test to determine whether you are allowed to file for bankruptcy under Chapter 7 if you earn more than the median income in your state. The bankruptcy court uses a complex formula that subtracts things such as your mortgage and food bills to determine whether your monthly income is less than $100. If your income is less than $100 per month, then you can file for Chapter 7 bankruptcy. If your income falls between $100 and $166 per month, the court will determine what percentage of your unsecured debt the trustee could pay off using your disposable income over a five-year period and decide whether you should apply under Chapter 7 or 13.

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