The Birmingham Legal Team Representing Bankruptcy Clients throughout Alabama
Bankruptcy is the legal status of a person or organization who cannot repay the debt it owes to creditors. There are six types of bankruptcy that an individual or organization can file depending on its needs: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Chapter 9 is municipal bankruptcy, Chapter 11 provides for the reorganization of a business, Chapter 12 is bankruptcy of a family farmer and family fisherman, and Chapter 15 provides mechanisms for dealing with debtors and creditors involving more than one country. The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. A filing under Chapter 7 is called liquidation, and allows for a full discharge of unsecured debt, which is debt in which the creditor does not have a property interest in the assets of the debtor. An example of unsecured debt would be credit card debt or medical bills. Secured debts are those such as mortgages and liens that are collateralized by assets. A bankruptcy discharge releases the debtor from personal liability for certain types of debts, so that the debtor is no longer legally required to pay any debts that are discharged. A discharge is permanent and prohibits creditors from collecting or taking action to collect discharged debts.
Chapter 13 allows the debtor to develop a manageable payment plan to repay debt over a 3 to 5 year period. To determine which type of bankruptcy a debtor is eligible for, the “means test” is used. The means test takes into account monthly income, amount and kind of debts, and other aspects of a debtor’s financial situation to determine if a person’s income is low enough to qualify for Chapter 7. If a debtor’s average monthly income for the past 6 months is below the state median for the debtor’s size household, the requirements of the “means test” are met. If not, they may then decide to file a under Chapter 13.