There are several different types of bankruptcy you can file, but the main types of consumer bankruptcy are Chapter 7 and Chapter 13 bankruptcy. Chapter 13 is where you pay some or all of your unsecured debts for five years through the Bankruptcy Court. Anyone can file this type of bankruptcy and no one will take your property away and sell it to pay off your creditors. Chapter 7 bankruptcy is a quick way to get rid of your unsecured debts.
Unsecured debts are credit cards, medical bills, personal loans, and payday loans. If you don’t have any property you cannot protect then it can help get rid of your debts. There are several main factors to see if you qualify to file Chapter 7 and to determine if it is the best option for you. The first consideration is whether you have filed bankruptcy in the past. You can file Chapter 7 bankruptcy once every eight years so that’s important. Second, you must qualify and qualifying is based on your average monthly gross income for the previous six months. We average this by looking at your pay stubs. The third thing to consider is that Chapter 7 is called a liquidation bankruptcy. If there is any property you cannot protect and you filed Chapter 7, the Trustee coild take it from you, sell it, and pay off your unsecured creditors.
Filing every eight years means eight years from the filing date, not the discharge date. If the eight years has not passed, you will have to file a Chapter 13 to obtain debt relief because you will not be eligible for Chapter 7. To qualify based on your income, if your average last six months income is less than a number on an IRS chart then you qualify. If it is over that number, you have to take something called the ‘means test’ and we can run that for you.
The first step of the Means Test is to see if your annual household income is higher than the average income of a household of your same size in Alabama. These average household incomes for each state can be found on IRS charts online and are updated periodically. Your bankruptcy attorney basically averages your last six months gross household income, which is then annualized, and if this annual household income is lower than the number on the chart (average household income for your family size in Alabama), then you pass the Means Test and can file Chapter 7 bankruptcy.
However, if your household income is above the average, then you must go through the means test. This step takes your average monthly household income for the previous six months and allows deductions of certain expenses on a budget. This budget is very arbitrary and sometimes unfair, but a local bankruptcy attorney in Birmingham can run this test for you when you come into meet them.
The expenses allowed on this budget are spelled out in the bankruptcy law, such as payroll taxes, insurance, and secured debt payments. You also get amounts for food, clothing, and other household costs from charts for a family of your size in your state. If you have too much disposable income at the end of this test, then you fail the Means Test and cannot file Chapter 7 bankruptcy. However, Chapter 13 bankruptcy can also help you out in many circumstances.
When you file a Chapter 7, something called a bankruptcy estate is opened up and everything you own is part of it. An attorney called a Trustee is appointed to your bankruptcy to administer this estate. If you have unprotected equity in your home, then the Trustee could hold an auction to sell the property and give the proceeds to all of your creditors. However, you can protect your property through bankruptcy exemptions.
As long as you don’t have a lot of equity in your home then you can usually protect such equity and the Trustee won’t be able to touch your property. If you don’t have vacant land, homes with lots of equity in them, or other such property then you can file a no asset Chapter 7 bankruptcy, which are what most Chapter 7 bankruptcies actually are. If you are filing alone, you can protect a little over $15,000 in equity in your home. This amount doubles (to over $30,000) if you are married and filing together. You can protect a little over $7500 in personal property, which doubles to a little over $15,000 if you are married and filing together. This property consideration is important and is why you should consult a local bankruptcy attorney in Birmingham, or where you are living, prior to filing. Once you file a Chapter 7, you generally cannot get out just because your property is at risk.