Bankruptcy is also called insolvency, and happens when a person or business cannot repay debts. When this happens, creditors may file a bankruptcy petition against them (involuntary bankruptcy). However, in most cases, debtors file the petition (voluntary bankruptcy).
Debtors with massive credit card debts, medical bills, tax debts, professional malpractice debts, utilities arrears, foreclosures, divorce pleadings and legal bills may need to file for Chapter 7 bankruptcy. A Chapter 7 discharge releases the debtor from all personal liability for the debts they have amassed. Once the bankruptcy petition has been filed, all collections attempts must stop under the automatic stay provision. They must cease any and all collections activity. Some lawsuits and debts are not exempt, such as student loans.
To file for Chapter 7 bankruptcy, the debtor must take a Chapter 7 Means Test and provide the court with a current monthly income statement. This is a three-step calculation that takes income and expenses into account and ensures people are not abusing the bankruptcy system. If the debtor’s income is below the state median income for filing Chapter 7 bankruptcy, the debtor is not required to take the means test. However, this varies from state to state.