How to Reduce or Eliminate Debt Under Federal Bankruptcy Law

Personal bankruptcy allows people wanting to eliminate or reduce their debt a chance to do. Unlike debt collection or debt management, people are allowed to file bankruptcy and legally protect themselves against creditor’s filing lawsuits, repossessing property or taking their earnings through wage garnishments. However, before people can file, they must determine if they are eligible for bankruptcy by conducting what is called a means test. The means test compares individuals’ income—after monthly expenses are deducted—to their state’s median household income for their size or number of people.

Individuals Can File Chapter 7 Bankruptcy If Their Income Falls Below

If people’s income falls below their state’s median income for the household of their size, then they can file chapter 7 bankruptcy. For instance, an individual living in Alabama with four people in their household may qualify for chapter 7. However, as 2010 their income has to be less than $65,079 which is Alabama’s median income for a family of that size, according to the U.S. Trustee Program. Once they are eligible, they are allowed to eliminate their debts without repaying creditors. However, there is a drawback. People may have to turn over property not considered exempt.

People Can Reduce Debts If They Are Above The Median Income

Although people can’t file for chapter 7, if their income is higher than their state’s median they can still reduce debts. Chapter 13 allows people to reduce debt through repayment plans. The amount of money they pay monthly depends on the amount of money they owe creditors. Once the U.S. Bankruptcy Court approves the repayment plans, people are required to make the monthly payments to bankruptcy trustees. After approximately three to five years, debts are completely discharged.  

Bankruptcy Law Prohibits Creditors From Debt Collection

In bankruptcy law, there is a term called an automatic stay. Once bankruptcy cases are filed, the automatic stay is in place. This means that while people are trying to eliminate or reduce debts, creditors are not allowed to pursue any debt collection. Thus, if that individual in Alabama is trying to stop a wage garnishment, once the person files the creditor must stop pursuing the garnishment.

People Should Contact Bankrupt Attorneys to Assist Them

Bankruptcy attorneys will help anyone trying to reduce debts or eliminate them. They help with determining whether which bankruptcy option is right for them. Then file the appropriate bankruptcy paperwork.