The majority of all consumer bankruptcy filings are for Chapter 7. For those in dire financial straits, Chapter 7 provides a means for a fresh start. Chapter 7 is oftentimes referred to as liquidation because debtors are required to sell their non-exempt resources and distribute the proceeds to creditors. While the prospect of liquidating your property is indeed troubling, the key here is that debtors are only required to sell non-exempt resources. In many instances this means that debtors can file for Chapter 7 without losing any assets. Gaining a better understanding of Chapter 7 bankruptcy will help you determine whether it is suitable for your circumstances.
Who Is A Candidate For Chapter 7 Bankruptcy
Liquidation can be problematic for businesses so Chapter 7 is generally most appropriate for individual debtors. But even among individuals, Chapter 7 is not always the best alternative; Chapter 13 bankruptcy sometimes provides a better remedy to those with a regular income. It is safe to say, however, that for debtors with little or no income, Chapter 7 is usually the most suitable type of bankruptcy. The one limitation is that debtors who have had their debt discharged under Chapter 7 or have completed a Chapter 13 plan within the past eight years cannot petition for Chapter 7.
Should you file for Chapter 7 bankruptcy?
In determining whether to file for Chapter 7 you should evaluate your financial situation with a bankruptcy attorney. Ultimately you must decide whether you have enough debt to justify filing for bankruptcy. The amount of debt is not as important as your inability to repay it. Some debtors file for bankruptcy with a relatively small amount of debt while others wait until they have accumulated exorbitant amounts of debt before filing. With the assistance of an attorney, you should evaluate your debt, income, expenses and assets. A careful examination of this will help you determine whether Chapter 7 is suitable.
Chapter 7 only discharges certain types of debt so the first thing to consider is whether filing will discharge your debts. In most instances, Chapter 7 discharges the following types of debt:
- Medical bills
- Civil judgments
- Credit card debt
- Unsecured loans
You also need to know which types of debt cannot be discharged under Chapter 7. The following debts fall into this category:
- Student loans
- Unpaid taxes
- Child support
- Secured loans such as mortgage and car payments
- Criminal fines
Because Chapter 7 does not discharge every type of debt, the real question is whether your dischargeable debt is high enough to justify filing for Chapter 7. If your debt consists mostly of student loans and unpaid taxes, Chapter 7 is probably not a suitable remedy. If your debt consists mostly of credit card debt and medical expenses, however, Chapter 7 could be very appropriate. As a general rule, Chapter 7 is only suitable if your dischargeable debt outweighs your assets and you have little chance of repaying the debt.
Your evaluation would not be complete without also considering your assets. Some assets are exempt from liquidation, meaning that you can retain them. Other assets must be surrendered and sold during Chapter 7 to provide creditors with at least partial payment. In most instances, the following assets are exempt from liquidation:
- One automobile
- A primary place of residence and the equity in the property
- 401K plans
- Life insurance policies
- Personal effects such as household items and clothing.
Any non-exempt assets can be subject to liquidation. Debtors with a significant amount of non-exempt assets must be ready to surrender them if they file for Chapter 7.
The U.S. Bankruptcy Code requires debtors to disclose all of their monthly income and expenses. In addition to wages earned, debtors must disclose all other sources of income. The income and expenses are subjected to a means test. Debtors who pass the means test are presumed to qualify for Chapter 7. Debtors who do not qualify may still be able to file for Chapter 13.
How Chapter 7 works
When you file for Chapter 7, an automatic stay is immediately issued which prevents creditors from collecting debts and repossessing your property. A trustee is appointed to collect all non-exempt assets. The trustee then sells the non-exempt assets and divides the proceeds among your creditors. Not everybody loses their assets – exempt assets are not subject to forfeiture. Once the bankruptcy is complete all of your dischargeable debts will be discharged.
If you are concerned about losing certain assets in a Chapter 7 proceeding, you may be able to sign what is called a reaffirmation agreement. A reaffirmation agreement essentially permits you to keep certain property outside of the bankruptcy. By executing a reaffirmation agreement you can continue to pay down a mortgage or car payment to prevent forfeiture.
The most difficult part of filing for Chapter 7 is determining whether it is suitable to do so. An attorney can help you evaluate your circumstances. After deciding that Chapter 7 is indeed suitable, the bankruptcy proceeding mostly consists of following the rules outlined in the U.S. Bankruptcy Code. A bankruptcy attorney can help you follow the appropriate timeline and ensure that all of the requisite paperwork is filed.