Chapter 7 Bankruptcy

    Personal bankruptcy filings can be either a Chapter 7 bankruptcy or a Chapter 13  bankruptcy , businesses will use a Chapter 11 bankruptcy filing.  Each of these sections of the federal code allows a legal remedy for individuals who cannot pay their debts.  A Chapter 7 bankruptcy filing, which is referred to as straight bankruptcy, allows for liquidation of non-exempted assets with the proceeds of the liquidation used to payoff non-secured debts.   A Chapter 13 bankruptcy filing provides for a restructuring of the debt and the payments schedule over a three to five year period.  Instead of the debt being discharged, it is paid off.

 Filing Chapter 7 Bankruptcy

     Before filing under either Chapter 7 bankruptcy or Chapter 13 bankruptcy, the debtor is required to consult with a debt counselor.  This debt counseling agency must be approved by the United States Trustee's office.  The debt counseling agency evaluates the debtor to see if he/she qualifies for bankruptcy filing, and which one.  Under the current bankruptcy law the debtor is subject to a means test.  The first step is to determine monthly income which is calculated as a six month average that is then compared to the median income for the area and family size.  If the debtors income exceeds the median income, then a Chapter 7 bankruptcy filing is not possible.  The next step for the debtor whose income is at or below the median is to determine allowable expenses.  These are based on IRS standards, not actual expenses.  Disposable income is the amount remaining after allowable expenses are deducted from the monthly income figure.  If the amount is $100 or less, then the individual qualifies for Chapter 7 bankruptcy.

Assets in Chapter 7 Bankruptcy

      Next, the value of the assets to be liquidated has to be determined.  Certain assets are exempted from liquidation.  This may differ depending on the state so you want to check and see what your states rules are if you have lived in the state for two years or more.  Assets have to be valued based on the replacement value from a retail vendor.  The court appointed trustee then sells these assets and uses the proceeds to payoff as many of the creditors as possible.  Any debts that may be remaining after the liquidation are discharged (or wiped off) so that after a period of several months, the Chapter 7 bankruptcy filer in effect starts over.  Certain debts are not covered by the filing and cannot be discharged, like alimony, child support and student loan obligations.  The filer has to attend a financial management class to learn how to handle his finances before the proceeding is complete.  A Chapter 7 bankruptcy filing can only take place once every six years.

     The bankruptcy filing will be on the filer's credit record for a period of ten years.  This means it will be harder to get credit, car loans and mortgages. However, it is possible, there are many firms that service people in this category.

The big advantage of filing under Chapter 7 bankruptcy is that the whole process is over in three or four months and the person is out from under the burden of debt (except for the exempted debts). Most people prefer chapter 7 bankruptcy.