Bankruptcy For The Individual Under The Newly Revised Bankruptcy Code

An individual person can currently file bankruptcy under one of two Federal Bankruptcy Chapters: Chapter 7 (clean slate/start over) and Chapter 13 (restructure of indebtedness). Chapter 7 Bankruptcy is used to discharge the individual from his or her debts. Chapter 13 Bankruptcy is used to restructure a person’s debts and allow him or her to keep certain assets under a revised payment plan.

Recent Changes in the Bankruptcy Code
Until a few years ago just about everyone who had not filed bankruptcy within the preceding six years and had no disposable income to pay the bills was eligible for Chapter 7 bankruptcy.
This meant that the person was eligible for a discharge of his or her debts and could start over with a clean slate even with an elevated income. But under the newly revised Bankruptcy Code, a person must now wait eight years in between bankruptcy filings. An “Income Eligibility Requirement” has also been added to the bankruptcy code.

Income Eligibility Requirement
In brief, the Bankruptcy Code now determines a person’s eligibility for Chapter 7 bankruptcy relief by looking at the person’s (1) household income, and (2) annualized median income per household in the county for the six months leading up to the bankruptcy filing. A bankruptcy court may look at the county where the debtor resides at the time of filing bankruptcy to determine the median income to be applied in the case. If the debtor resides in a county with a lower median income, the Bankruptcy court may require a lower household income than for someone residing in a county with a higher median income county.

There are exceptions for someone with a higher household income than the median county income. Some exceptions include legally required payroll deductions, living expenses and secured loan deductions. Once these exceptions are accounted for a debtor may be eligible for Chapter 7 relief even if his or her household income is higher than the median.

How the Income Eligibility Requirement Might Temporarily Help Bankruptcy Debtors
It may sound strange to say it, but the length of time now required to prove a person’s eligibility for Chapter 7 relief can be temporarily helpful to the debtor. One instance where the additional income requirements may be helpful is when the debtor has filed a petition for bankruptcy and is no longer able to make payments on his or her home mortgage. Once the Debtor files bankruptcy, an Automatic Stay goes into effect. This means a mortgage holding bank is legally required to stop the foreclosure process until the Automatic Stay is lifted by the court. Bankruptcy courts are less likely to lift an Automatic Stay until the Debtors income has been determined. The longer it takes to determine the income, the longer the Automatic Stay prohibits foreclosure proceedings.

Once the Automatic Stay is lifted, a typical foreclosure proceeding can take an additional 3 to 6 months to conclude. Given the current economic climate, it is not uncommon for Debtors to remain in a home “mortgage free” for a year or more.
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