Bankruptcy law is covered under federal and is a constitutional right for any American. If an American is falling behind in paying off debts and it appears that they cannot make their payments without going further into debt, then it is the right time to file bankruptcy.

For this reason, the federal government created the Bankruptcy code, bankruptcy rules of procedure, and a system of bankruptcy courts to handle bankruptcies throughout the country.

In addition to the provisions outlined in the bankruptcy code for individuals, it also gives states the authority to expand the categories of exempt assets if they choose.

The good news for all residents is that your state protects many assets of individuals in severe debt.

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Bankruptcy Laws, Bankruptcy Forms & Bankruptcy Exemptions

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The biggest misconception surrounding bankruptcy is that it gets rid of all debt. The law is designed to help Americans, not erase debt. A debtor is still responsible for alimony, child support, some of the most recent back taxes, most student loans, and recent large purchases of more than $550.00 for luxury goods bought within the 90 days of filing.

Additionally, a bankruptcy does not erase fine or penalties of government agencies, fraudulent debts, and cash advances of $825.00 within 70 days of filing. A bankruptcy is filed under chapter 7, which is known as a straight bankruptcy to wipe out all debts except those listed above, or chapter 13, which is known as a wage earner bankruptcy to set up a repayment plan to pay back debts over time.

The first consideration when approaching bankruptcy is which type to file. Federal law provides a means test, which determines whether an individual is eligible to file chapter 7 bankruptcies. If the income of the person filing is below the median income, based on census data, they are automatically eligible. If a person makes more than the median income then the court considers the past six months along with mortgage and car payments, back taxes, child support due, and school expenses up to $1650 per year.

If, after deducting all of these amounts, and the living expenses left over meet the standards outlined by the Internal Revenue Service (IRS), a debtor can still pay at least $6000 to unsecured creditors over a five-year period, then the only option is a chapter 13 bankruptcy. For all cases filed after March 15, 2009, the median income for an individual is $42,468, for a family of two is $52,939, for a family of three is $60,182, and a family of four is $71,124.

Individuals after that number add an additional $6,900 dollars. In addition to the type of bankruptcy an individual chooses or is eligible for, any cases after October 17, 2005, a debtor must obtain approved credit counseling before they will be allowed to file. In addition, the law requires that anyone filing bankruptcy must file any overdue tax returns within a short period of filing.

In a chapter 7 bankruptcy, a trustee is appointed by the court. This trustee gathers and sells any non-exempt assets in order to pay off as many creditors as possible. However, most chapter 7 bankruptcies fall under a “no-asset” status, which means that debtors do not have anything for a trustee to sell.

In both Federal and State law, anyone filing for bankruptcy must submit a statement of financial affairs. This document provides schedules and a detailed list of all debt including all priority debts, all secured debts, and all unsecured debts such as credit cards. Other information required on the form is the names and addresses of all creditors, a list of all assets including real estate and all forms of personal property.

This document must be filled out completely and properly or they will not be handled by the bankruptcy case. During the bankruptcy proceedings creditors are immediately prevented from trying to collect debts unless they can provide the court evidence that there is a “clause” in their agreement that will allow them to keep collecting during a bankruptcy case.

Once a chapter 7 is filed, the filer must appear in at the “first meeting of creditors” where the debtor will be questioned under oath about all debts provided. Under law, creditors have 60 days after this meeting to convince the court that a debtor should not be allowed to get rid of debts. During this time frame, the trustee will analyze all income to determine if anything can be paid to creditors.

As mentioned above, Federal law covers bankruptcies, but the states determine what is exempt or the person filing bankruptcy is allowed to keep. The best advice when considering bankruptcy is to seek the counsel of an attorney to determine not only which type of bankruptcy is best, but to also get advice on the proper forms and what is needed to make the case as effective as possible.