What is Chapter 7 Bankruptcy?
When debt totals gets so high that payments place too much stress on all elements of a debtor’s life, then some turn to Chapter 7 Bankruptcy to help them start over. Chapter 7 Bankruptcy provides for the liquidation of a debtor’s non-exempt assets, which are used for the repayment of debt owed to creditors. Also known as “Straight Bankruptcy,” Chapter 7 is the simplest and most straightforward bankruptcy option for eliminating debt and repaying creditors.
The United States Bankruptcy Code requires that the debtor’s “current monthly income” be compared to the “state median” to determine if a “Means Test” should be run. The Means Test will measure whether the bankruptcy is warranted by calculating the “disposable income” by subtracting “necessary living expenses” from the “current monthly income.”
When is Chapter 7 Advisable?
Chapter 7 Bankruptcy is advisable when the following debtor conditions are met:
- Can’t continue to make payments
- Doesn’t own many valuable assets
- Is current on car and home payments
- Has no disposable income after debt payments
How Does Chapter 7 Differ from Chapter 13 Bankruptcy?
With Chapter 7 Bankruptcy, there is no repayment plan established; the Bankruptcy Trustee will liquidate the debtor’s remaining non-exempt assets (which may include property in which the debtor owns some interest) and distribute them to the creditors (claim holders) of record.
With Chapter 13 Bankruptcy, the debtor develops a repayment plan for three to five years. It is easier to protect valuable assets under a Chapter 13 filing.
What Assets are Exempt From Seizure?”
Each state determines the exact amount or type of property exempt from bankruptcy liquidation. Usually, this includes one home, one car and personal items (without much resale value). Most states establish a certain monetary amount of protection for this exempt property.
Why do Creditors Have a Claim on My Property?
Creditors prepare for the possibility of a debtor failing to complete repayment of their loans by placing “liens” on valuable property. A “lien” is a “security interest” or “claim” on property, which can be enforced in a court of law. The lien permits the creditor to repossess the property when the debtor defaults on the loan. The creditor must “publish the lien” in a newspaper or official document to “perfect the lien.”
A “purchase-money security interest” is established when money from a loan is used to purchase an item. Some problems may arise when there are multiple “pledges on the same property.”
A “mortgage” is a lien on real estate that permits creditors (usually a bank or financial institution) to repossess (foreclose on) the real estate if mortgage payments are missed.
Basic Chapter 7 Process
This is a simplified list of the Chapter 7 process:
- Petition filed and court fee paid
- Court sends notices to creditors and debtor
- Debtor submits copies of recent federal income tax returns
- “341 Meeting” of creditors
- Trustee liquidates property and distributes to creditors
Disadvantages of Chapter 7 Bankruptcy
The disadvantages of Chapter 7 Bankruptcy include the following:
- Potential loss of property
- Eight years to clear off record
- Damages credit rating
Chapter 7 Bankruptcy Provides a Fresh Start
When debtors have become frustrated with their attempts to repay their debts, then Chapter 7 Bankruptcy provides a fresh start. Debtors must be careful with bankruptcy because not all debts are discharged. The court carefully examines questionable abuse or fraud where non-exempt property is illegally transferred to friends and family. A bankruptcy discharge does not eliminate a lien on property. Chapter 7 Bankruptcy can give debtors a new lease on life if they need to escape a mountain of debt.