EveryBody's Guide to the Law

Chapter 7 Bankruptcy
Chapter 7 of the bankruptcy code lays out the procedure for filing for “straight” bankruptcy.
The purpose of letting you declare bankruptcy is to let you get a fresh economic start in life. In
a chapter 7 proceeding, all of your assets (except those that are exempt) are gathered up and
sold, and your creditors are paid off with the proceeds. Except for a few types of obligations
(discussed below), once the bankruptcy is finished, all of your debts are discharged, even if
your creditors get only pennies on the dollar. Most chapter 7 bankruptcies start when you, the
debtor, file for bankruptcy. Sometimes a creditor files an “involuntary petition” to force the
debtor into bankruptcy.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
On April 20, 2005, President George W. Bush signed into law the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, which changed the face of bankruptcy radically.
While a few of its provisions went into effect immediately, most of the provisions took
effect October 17, 2005, 180 days after the act was signed into law. Backed by credit card
issuers, who frequently received little or nothing if a person declared chapter 7 bankruptcy,
the new act makes it much more difficult for persons to file for chapter 7 protection. Credit
card companies are partly to blame for the number of bankruptcies filed each year, as they are
too quick to give credit cards to people who cannot really afford to have them. Credit card
companies are now found on university campuses soliciting business from students who have
no income—other then their student loans—to pay the minimum monthly payment.
Under the new act, before a person can file for bankruptcy, he or she must attend a government-approved
credit-counseling program. A person’s eligibility to file for chapter 7 bankruptcy
is determined by a “means test.” If your monthly income is less than the median income
in your state, you will be able to file for bankruptcy under chapter 7. In 2001–2002, the average
for median household income in the entire United States was $42,654 a year. State
median incomes during that period ranged from $29,752 in West Virginia and $30,761 in Mississippi
to $53,791 in Connecticut and $55,525 in Alaska.
If your income is above the median income in your state, but your net income (gross
income minus allowable exceptions) is less than $100 a month ($6,000 over a five-yearperiod),
you are eligible to file for chapter 7 bankruptcy. On the other hand, if your income is
above the median income for your state, but your net income is equal to or more than $166.67
a month ($10,000 over five years), you are not eligible to file for chapter 7 but may be able to
file for chapter 13 bankruptcy. If your monthly income is in the middle of these two
extremes—$100 to $166.66 ($6,000 – $9,999 over five years)—a chapter 7 bankruptcy will be
dismissed or converted to a chapter 13 bankruptcy only if you have sufficient income to pay 25
percent of nonpriority unsecured debts.
434 Everybody’s Guide to the Law