What is Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to eliminate or repay their debts under the protection of the court. It provides a fresh start for those overwhelmed by financial burdens. Bankruptcy is governed by federal law, specifically the United States Bankruptcy Code. While the process has a nationwide legal foundation, state-specific factors like median income can influence who is eligible for certain forms of bankruptcy, including residents of Massachusetts.
There are different types of bankruptcy, but the most common ones for individuals are Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy involves the liquidation of assets to repay creditors, while Chapter 13 bankruptcy allows individuals to create a repayment plan over a specific period, typically three to five years. A common misconception about bankruptcy is that a high income can disqualify you from filing. Contrary to popular belief, having a substantial income doesn’t necessarily disqualify you from filing for bankruptcy.
Who Can File for Bankruptcy?
The root of this misconception can often be traced back to Chapter 7 bankruptcy and the means test it requires. In a Chapter 7 bankruptcy, the court may liquidate your non-exempt assets to pay off your debts. But before you can file, you need to pass a means test that compares your average monthly income over the past six months to your state’s median income for a household of your size.
- Below the Median: If your income is below the state median, you automatically qualify for Chapter 7.
- Above the Median: If you earn more, you’ll undergo additional calculations involving your debts and allowable expenses to determine eligibility.
In Massachusetts, the median income varies depending on the size of your household, and the figures are adjusted periodically to account for changes in the cost of living.
If you don’t qualify for Chapter 7, Chapter 13 bankruptcy might be a viable alternative. Unlike Chapter 7, there is no means test for Chapter 13. Instead, you propose a 3- to 5-year repayment plan based on your disposable income and debt load. However, Chapter 13 does come with its own set of debt limits.
What Will Happen to My Assets in Bankruptcy?
Protection of your assets varies between Chapter 7 and Chapter 13. In Chapter 7, non-exempt assets may be sold off. However, Massachusetts allows you to protect certain kinds of assets up to a specific value, like your home or car. Chapter 13 generally allows you to keep all your assets but requires that you make monthly payments toward your debt.
Will Bankruptcy Affect My Credit Score?
Bankruptcy does have a considerable impact on your credit score, but it’s often not permanent. Chapter 7 bankruptcy can stay on your credit report for up to 10 years, while Chapter 13 remains for seven. However, many people find that their credit begins to improve a few years after filing as their debt-to-income ratios improve.
Are There Any Alternatives to Bankruptcy?
Yes, options like debt settlement, debt management plans, or negotiation with creditors can sometimes serve as effective alternatives. However, each comes with its own set of pros and cons that should be weighed carefully.
How Can an Experienced Lawyer Help?
Navigating the complexities of bankruptcy law can be overwhelming, especially when it comes to determining your eligibility based on income or windfalls. An experienced bankruptcy lawyer can guide you through the entire process, ensuring that you understand your rights and options:
- Eligibility Determination: They can guide you through income checks and the means test.
- Filing Assistance: Your lawyer can help you compile necessary documents and choose the most appropriate bankruptcy type.
- Asset Management: An attorney can advise you on how to best protect assets like your home or car during bankruptcy.
A skilled lawyer will assess your financial situation, help you complete the means test accurately, and determine the most appropriate bankruptcy chapter for your circumstances. They will also provide valuable advice on how to protect your assets and maximize the benefits of bankruptcy.
In Massachusetts, bankruptcy law can be influenced by specific case law and statutes of limitations. Consulting with a lawyer who is well-versed in Massachusetts bankruptcy law ensures that you receive accurate and up-to-date information tailored to your situation.
If you are considering filing for bankruptcy or have concerns about your eligibility, call Benner Law at (774) 404-8321 for a free case evaluation!