Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is also called straight bankruptcy or liquidation. Unlike Chapter 13 Bankruptcy (a reogranization), the debts are not reorganized to be paid off. Instead, all assets beyond those exempted by state and federal laws are sold (liquidated) by the United States Trustee, and the proceeds are used to pay the creditors, and the remaining debts are discharged.
Advantages to Chapter 7
A Chapter 7 bankruptcy procides the debtor with a clean start. Although their assets are taken away, they are debt free and are able to start building a new financial future. For someone who is able to pay their living expenses, but cannot cover the payments on their existing debts, bankruptcy provides a way out, and an opportunity to move forward.
Drawbacks to Chapter 7
Although all debts are discharged, certain classes of debt remain. Any debts that are secured via lien remain in effect via the lien. For example, your mortgage and car loans remain secured against the property, and if you fail to make payments, they can reposess or foreclose the asset, making the discharge theoretical and not real. In addition, child support, most taxes, student loans (although there are exceptions), plus fines and court imposed restitution are not discharged. If the debts are from a non-discharable category, bankruptcy may not provide the clean start that is desired.
Means Testing
Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), debtors whose income exceeds the state median are subject to a means test to determine if they could repay part of their debts. Under means testing, if their income, subject to permitted allowances, would permit their debt to be repaid within 5 years, they may be forced into Chapter 13 or having their bankruptcy dismissed. As there are hardship exceptions and other court ordered remedies, you should consult an attorney in your area for advice on how means testing will affect your bankruptcy claim.
