A Primer On Chapter 7 Bankruptcy
The majority of individual bankruptcy filings in America are filed under two sections of the U.S. Bankruptcy Code: Chapter 7 and Chapter 13. These bankruptcy options have several things in common, both offering comprehensive debt relief, an end to creditor harassment, the ability to keep exempt assets from being repossessed or foreclosed upon, and the opportunity for a fresh financial start. They differ greatly in the approach taken to get those results, though.
Chapter 13 is better known as a “repayment” bankruptcy. It consolidates eligible debts into one monthly payment in a plan that lasts between three and five years. At the end of the plan, remaining debt is “discharged” or forgiven. The repayment plan cannot clear all debts, particularly those involving obligations to tax authorities, student loans (in most circumstances), alimony and child support, or any that were obtained fraudulently. It is beneficial for debtors who have a steady income and can reliably make monthly payments for the duration of the repayment period.
Chapter 7, on the other hand, does not involve a lengthy period of repayment. It is often referred to as a “liquidation” bankruptcy. A Chapter 7 bankruptcy plan begins with the sale of non-exempt assets by the bankruptcy trustee. The proceeds of any sold assets will be passed along to creditors according to their order of priority. It is important to note that the majority of personal assets – family home, furnishings, vehicle, work implements, clothing – are generally considered exempt from sale under state or federal bankruptcy laws and will not be included. After all sale proceeds have been spent, remaining eligible debts are forgiven, something that can take as little as 60 to 90 days after the filing. Like Chapter 13, though, there are also certain types of debts that cannot be discharged by a Chapter 7 filing, namely student loans, spousal support, taxes, child support and “ill-gotten gains.”
Unique aspects of Chapter 7
The way in which debt is discharged is not the only thing that sets Chapter 7 apart from other bankruptcy options. Since sweeping bankruptcy reform took effect in 2005, it is harder to qualify for the comprehensive debt relief offered by Chapter 7. In order to be eligible for Chapter 7 bankruptcy protection, debtors now have to pass what is known as a “means test,” wherein the bankruptcy court can determine, based on the filer’s debts, income and assets, if Chapter 7 is an option. For eligible filers, it usually takes considerably less time to get financial relief than with a Chapter 13 filing.
Making the right choice
Chapter 7 does offer relief from a number of different debts, but it does have shortcomings. Most bankruptcy filings, Chapter 7 included, cannot discharge every type of debt, so it is important that the filer take advantage of any mandatory credit or debt counseling that may be required by the bankruptcy court as part of the filing. There are also limits on the number of bankruptcy proceedings that a person can file, so future debt relief efforts could be more complicated. Furthermore, while debt relief does come swiftly in a Chapter 7 case, and credit repair can begin soon after a filing, the bankruptcy will remain on the filer’s credit report for seven to 10 years.
There are many different debt relief options available to those dealing with creditor harassment, possible foreclosure, vehicle repossession and insurmountable debt. It is important to choose the debt management method that best fits your unique financial situation. To learn more about Chapter 7 bankruptcy or other debt relief, speak with an experienced bankruptcy attorney in your area.