Bankruptcy laws are federal statutory laws created by the U.S. Congress. Therefore, bankruptcy law is regulated by the federal government and administered by the federal courts. Because bankruptcy laws are federal in nature, the same laws apply to all states. The federal rules of bankruptcy procedure and the federal Bankruptcy Code have enumerated these laws.
According to the Supreme Court, the principle of bankruptcy law in the United States has historically been to provide the honest but unfortunate debtor with a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. Chapter 7 bankruptcy offers debtors a fresh start but not all debtors can file for Chapter 7 bankruptcy. A debtor must qualify to file for Chapter 7 bankruptcy.
A debtor qualifies for Chapter 7 by passing the means test. To take the means test, the debtor compares her family income to the median family income for a family of the same size in her state of residence. If her family income is less than the state median, she can file for Chapter 7 bankruptcy. If her family income is more than the state median, she must calculate her monthly disposable income to determine if she qualifies to file for Chapter 7 bankruptcy.
Chapter 7 Process
After a debtor files his Chapter 7 bankruptcy petition, the debtor’s property becomes property of the bankruptcy estate. In addition to the petition, the debtor must also file Schedule C to claim property as exempt. The debtor can keep this property. Federal law or the state’s law lists the property that the debtor can keep. The bankruptcy trustee sells the remainder of the property of the bankruptcy estate to raise cash to pay the debtor’s creditors. After the creditors have been paid, the debtor may receive a discharge of his debts.
Chapter 13 Process
Instead of offering the debtor a fresh start, the Bankruptcy Code offers the debtor the opportunity to reorganize his debts and repay them over an extended period of time. When a debtor files a Chapter 13 bankruptcy case, he must commit to a three- or five-year debt repayment plan. The debtor figures out the applicable commitment period of his debt repayment plan by taking the means test. If the debtor’s family income is less than the state median, his applicable commitment period will be three years. If the debtor’s family income is more than the state median, his applicable commitment period will be five years. Under the debt repayment plan, the debtor pays his disposable income each month. The bankruptcy trustee accepts the debtor’s monthly payments and distributes them to the debtor’s creditors each month. To receive a discharge under Chapter 13 bankruptcy, the debtor must make all monthly plan payments on time.