Chapter 7 Bankruptcy

Chapter 7 Bankruptcy

Filing for bankruptcy has a very negative connotation in society, but it’s a way for people who have found themselves in serious financial trouble to ease the burden of what they’ve done and allow them to start over.  Businesses don’t like it, but for consumers, it can be a life saver.

Let’s start by exploring the different types of bankruptcies.  There are three different filings you can make:  Chapter 7, Chapter 11, and Chapter 13.

Chapter 7 bankruptcy, sometimes call a straight bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors.

The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 will give that person a relatively quick “fresh start”.

One of the main purposes of Bankruptcy Law is to give a person, who is hopelessly burdened with debt, a fresh start by wiping out his or her debts.

New legislation has been passed regarding Chapter 7 bankruptcies.  Laws can vary from state to state, so you will want to check with someone who knows or do extensive research as to what is allowed to be discharged with a Chapter 7 and what is not.

Essentially what the new laws ask of people who are filing a Chapter 7 bankruptcy is twofold.  First, they must take an approved credit counseling course within six months before filing.  They must also complete an approved financial management course before any debts can be discharged.

Even though those two new stipulations are in place, it is still relatively easy to file for a Chapter 7 bankruptcy.  There are, of course, governmental “hoops” you will have to jump through which is why it is often a good idea to secure the services of a bankruptcy lawyer.  However, it is possible for you to do this yourself as long as you do your research and “cross your T’s and dot your I’s”!

What are the most common reasons given for filing a Chapter 7 bankruptcy?  Well, of course, it’s the accumulation of excessive debt!  But seriously, here are the most common reasons why people get into such debt: 

  • Medical bills
  • Unemployment
  • Divorce
  • Overextended credit
  • Large, unexpected expense

A Harvard Study reported that half of US bankruptcies were caused by medical bills. The study was published online in February of 2005 by Health Affairs. The Harvard study concluded that illness and medical bills caused half (50.4 percent) of the 1,458,000 personal bankruptcies in 2001. The study estimates that medical bankruptcies affect about 2 million Americans annually — counting debtors and their dependents, including about 700,000 children.

If you find that you have to file for a Chapter 7 bankruptcy, you may be worried about whether or not you’ll get to keep some of the things that are important to you and essential to life.  These things include a car and your home, among other things.

Unsecured debts, such as credit card debt, personal loans, money judgments and certain taxes are wiped out in a Chapter 7. However, certain debts are not dischargeable under Chapter 7 bankruptcy; these debts include, but are not limited to, most student loans, certain taxes, alimony and child or other court ordered support payments.

If a debt is secured by property, such as a home mortgage or an automobile loan, then you get to decide how to handle that debt. For example, in the case of a vehicle, you could: 

  1. Keep the automobile and the debt as long as you are current and continue keeps your payments current.
  2. “Redeem” the automobile which means pay it off at its current “fair market value”
  3. Return the vehicle, include any balance due in your bankruptcy and pay nothing further on the vehicle. The choice is yours.

In 99% of the Chapter 7 cases, the person filing bankruptcy keeps all of their property. Bankruptcy law is not meant to punish you and allows you to keep your property under what are called “exemptions” or things you get to keep. You keep your car, your house, your jewelry, the boat, your clothing, everything! 

Of course, if you still owe a debt on anything like your car and your house, you should refer to the above scenario.  If you want to discharge your car loan, you’ll have to either pay up or give up the car.