Straight bankruptcy is another name for the Chapter 7 federal bankruptcy law. Chapter 7 enables individuals, couples, or companies in serious financial trouble to resolve debts and get a fresh financial start.
Chapter 7 allows debtors to discharge unsecured debts, including many — though not all — purchases made on credit cards, while allowing them to maintain ownership and possession of some of their assets as they begin anew. On the other hand, debtors surrender the rest of their nonexempt assets, if any, which are sold off for the benefit of the creditors. Important note: Student loans, certain IRS debts, and criminal obligations are not discharged by straight bankruptcy.
Straight bankruptcy requires debtors to surrender their property to the court, which divides it among the debtor’s creditors in order to erase the debt. The court is not allowed to repossess certain exempt property deemed necessary for survival, such as equity in a residence. Debtors filing for Chapter 7 bankruptcy are usually allowed to keep their houses and vehicles, provided they aren’t in arrears on their normal monthly payments to the mortgage or finance company.
The debtor must give up all assets that exceed exemptions, so that the property can be liquidated to pay off creditors.
In the past it was possible for any individual or business to file for straight bankruptcy. However, the recently passed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) declares that you are eligible to file for bankruptcy under Chapter 7 only if you earn less than the median income for your state. Debtors who earn more than the median income in their state are only eligible to file for bankruptcy if they pass a means test to establish eligibility.
Means assessment involves an analysis of the debtor’s income and expenses. Essentially, if a family’s combined gross income is above the median family income in their state, they will not qualify for filing under Chapter 7 and will have to file for Chapter 13 bankruptcy instead.
Currently, the median gross income for a family of four in most states is over $50,000 per year. The court will take a debtor’s reasonable monthly expenses into account and subtract them from estimated monthly income. If the remainder, which is called the discretionary income, is below $100 a month, the debtor can file for Chapter 7. If the discretionary income is over $100, the debtor will have to file Chapter 13.
The new bankruptcy law requires the debtor to undergo credit counseling at an approved nonprofit budget and credit counseling agency within 180 days of filing for either Chapter 7 or Chapter 13 bankruptcy. The bankruptcy court clerk is required to maintain a publicly accessible list of approved credit counseling agencies.
A debtor who decides to file Chapter 7 needs to work with an attorney to develop schedules that divulge their creditors, assets, income, and expenses. These schedules and a voluntary petition for bankruptcy are signed and filed with the court. The filing of these documents immediately initiates an automatic stay; the bankruptcy clerk’s office notifies the creditors of the filings, and any harassment of the debtor by creditors must stop immediately. In roughly six months, the bankruptcy judge signs the discharge order, relieving the debtor of all dischargeable debt.
It’s important to note that certain debts are not dischargeable by the court. These include the following:
- appliances and other large purchases
- cash advances made within 60 days of filing for bankruptcy
- student loans
- some kinds of tax debt
- child support
- any debt due to a fraudulent act
If the debtor is behind on standard payments, such as a mortgage or a car loan, and wishes to keep assets such as a home or a car, straight bankruptcy is probably not the right choice. Chapter 7 bankruptcy does not eliminate mortgage holders or car loan creditors’ right to take property to cover the debt. For a glossary of bankruptcy terms, read Glossary of Common Bankruptcy Terminology.