BANKRUPTCY FACT SHEET

Who may file a bankruptcy petition?  

Any person “unable to pay their debts as they become due” is entitled to the fresh start of a bankruptcy petition.  

What types of bankruptcy is available?   

There are two types of bankruptcies available to consumers, a chapter 7 (straight bankruptcy) or a chapter 13 (repayment plan).   The primary reason a debtor will chose to file a chapter 13 is to either repay a mortgage arrearage or “strip” a second mortgage on their home.  Some debtors have to file a chapter 13 because they are required to based on their Means Test calculation.
 
How often may a consumer file bankruptcy?  

There is a difference between filing a case and receiving a Discharge Order.  A consumer is entitled to a chapter 7 discharge every eight (8) years.  A consumer is entitled to a chapter 13 discharge every four (4) years.  If a consumer files a bankruptcy case but did not receive a discharge, they may file another case.  It is important to remember that repetitive filings may affect the availability of the automatic stay.   Repetitive filers may have to face challenges to their petition due to bad faith.    

What is the automatic stay?  

When a person files a bankruptcy case, the automatic stay goes into effect.  The automatic stay prohibits any creditor from beginning or continuing a legal action against the debtor to enforce a debt.  The automatic stay goes into effect the moment the bankruptcy case is filed.  Actions taken in violation of the automatic stay are void meaning it did not legally happen.  For example, if a bankruptcy is filed at 2:00 p.m. and the foreclosure auction is at 2:05 p.m., the foreclosure auction had no legal effect. There are, of course, limited exceptions to the automatic stay but for the most part all creditor actions must cease.  

What is the Means Test?  

In 2005, Congress added the Means Test to the bankruptcy petition.  The Means Test is supposed to determine if a debtor has the financial means repay their creditors at least a portion of what is owed through a chapter 13 repayment plan.  There are two parts to the Means Test.  The first part of the Means Test determines if the debtor’s averaged annual income is above the state median for a family of similar size.   If the debtor’s averaged annual income is below the state median income for a family of the same size, then the debtor “passes” the means test and may file either a chapter 7 or chapter 13 bankruptcy petition.  If the averaged income is above the state median income for a family of the same size, the debtor must complete the second half of the means test.  Completion of the Means Test is an art not a science.  There is no way to estimate or ball-park if a debtor will pass the Means Test.  There are many legal issues imbedded in each line of the test.  It is important to realize the most debtor’s “pass” the Means Test, even if their income is above the state median.  Thus, most people have the option of filing either a chapter 7 or chapter 13 case.