All About Chapter 7 Bankruptcy

Chapter seven Bankrupt is not an easy remedy for debt, but the right candidate can benefit from this area of the law.

While there are many types of bankruptcy, Chapter 7 is the quickest and generally the easiest bankruptcy proceeding. Simply put, Chapter 7 eliminates your debts by selling your non-essential possessions and giving the money to your creditors. Because your assets turn into cash, this proceeding is called a "liquidation bankruptcy." In most cases, however, the amount of money generated from the liquidation is not enough to repay the debt, and, in these instances, the bankruptcy court evaluates the remaining debts. The court has the ability to wipe out certain debts, while other monies owed are legally binding, despite filing for bankruptcy.

From start to finish, Chapter 7 takes about four to six months, costs between $200 and $300, and requires only a few trips to the courthouse. The process, however, is far from simple. The court requires a list of creditors, assets, liabilities, income, expenditures, property, and other small details that can take weeks to gather. Additionally, you should evaluate the pros and cons of bankruptcy before filing, as many laws, loopholes, and legal jargon comprise Chapter 7. For example, one law is that you cannot file for Chapter 7 if you already had your debts discharged via bankruptcy in the last six years. A loophole to that law, though, is that if you filed for Chapter 13 Bankruptcy in "good faith" by paying at least 70% of your unsecured debt (e.g. credit card debt) back to your creditors, then you are free to file Chapter 7.

Other instances when filing for Chapter 7 is not recommended are:

-- If you can reasonably pay off your secured debts in three years. A secured debt is defined by creditors having the power to take your property if you do not pay promptly. For example, your car may be a secured debt because the dealership can take your car if you default on your payments. Your home is also a secured debt because the bank can foreclose on your mortgage if you are unable to pay.

-- If a co-signer of one of your loans was a friend or relative. Even if bankruptcy eliminates your liability for the loan, your co-signer remains responsible for the remainder of the debt.

-- If you accumulated a significant amount of luxury debt before filing for Chapter 7. In other words, if in the past two months, you took a big vacation or received cash advances, you should not expect these debts to be discharged.

This last reason embodies another important issue in Chapter 7 - honesty. The court does not treat dishonest people kindly in bankruptcy proceedings. If it feels the debtor purposefully went deeper into debt immediately before filing Chapter 7, the court is much harsher in its rulings. Chapter 7 bankruptcy is for those who cannot reasonably emerge from debt on their own and, thus, require help from the law. It is not for people who make poor financial choices and then seek absolution.

That type of behavior can be easily discovered at the court-mandated meeting with the debtor, his or her creditors, and the trustee of the bankruptcy case. As one of the steps of Chapter 7, this meeting is an opportunity for the creditors to question the motives and reasoning of the debtor. The meeting generally serves as a type of litmus test of the debtor's honesty.

In addition to the above-mentioned meeting, filing for bankruptcy also requires that you lose many of your possessions. Although you usually can keep your primary mode of transportation, basic clothing, you home (if it is modest and not beyond your means), and your household goods, you will have to resign yourself to giving up other possessions. Any collections you may have, significant luxury items, and "seconds" (second homes, second cars, second televisions, etc.) are generally the first items to be sold. Honesty emerges again as an important issue during the liquidation of property since debtors frequently try to hide their assets to avoid losing them. Bankruptcy trustees and creditors are well versed in the tricks of hiding assets, and, as mentioned earlier, any evidence of dishonesty on the debtor's part will only result in stiffer treatment from the court.

As well as losing some of your possessions, other difficult realities of Chapter 7 Bankruptcy are the debts that do not go away. For example, unpaid child support or alimony payments do not disappear, nor will student loans. Back taxes from the last three years will still be owed, as will any debts you have from judgment errors. Fraud (for instance, if you accumulated debt on a credit card that you got by lying on the credit application) or fines as a result of drunk driving are both debts you will still be responsible for after bankruptcy.

In sum, Chapter 7 bankruptcy requires debtors to evaluate their honesty and reasons for their debt, as well as what they will gain and lose from the process. The best candidate for Chapter 7 bankruptcy is an individual whose debts are honest and unavoidable and who is willing to forfeit property to reverse the financial situation. Chapter 7 is not an easy remedy for debt, but the right candidate can benefit from this area of the law.

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