In an era of financial hardship, Chapter 7 bankruptcy may be the last stop for people unable to resolve their debt problems through debt management or debt consolidation strategies.
Chapter 7 bankruptcy, one of six types authorized under federal law, is sometimes known as liquidation bankruptcy. This is because, unlike a Chapter 13 bankruptcy, there is no repayment plan.
Instead, those assets not protected by law are collected by a trustee and then sold to pay all or part of what you owe to creditors. You resolve your debts but end up poorer for it.
Who Qualifies for Chapter 7
In order to qualify for a Chapter 7 bankruptcy, the debtor must earn less than the state median income on a monthly basis, or submit to a “means test” that examines his or her financial records, including income, expenses, and secured and unsecured debt.
Mortgages and car loans are examples of secured debts. Unsecured debt can include credit card bills, personal loans, medical bills or even bad checks.
Once it is determined that an individual qualifies for Chapter 7 bankruptcy, he or she will have all debts discharged when the liquidation process is completed. This is intended to give a “fresh start” to debtors who often desperately need one.
To start the process, the debtor must file a petition with the local bankruptcy court. Financial statements also must be filed, including records of assets, liabilities, income, expenses and overall financial standing, as well as any existing contracts or leases in the debtor’s name. Credit counseling also is required for individuals filing under Chapter 7, along with payment of filing and court fees.
What can be saved from liquidation will vary, depending on the state in which the debtor files for relief. A person may be able to save his house, a car and equipment or property needed for work. But he or she likely will be forced to give up savings and investments, family heirlooms and valuable collections.
Because determining what must be sold is complex, a debtor considering Chapter 7 should consult a local attorney well-versed in such matters.
Debt Consolidation Is an Option
If you want to avoid bankruptcy filing, debt consolidation may be a process that gives you a chance to get out of debt in a 3-to-5 year span.
Debt consolidation allows you combine several unsecured debts into a single loan and single payment from you that satisfies all your creditors. The loan could result in lower interest rates and lower monthly payments, but also may extend the time needed to satisfy all your debts and thus end up costing you more money.
There are many non-profit consumer credit counseling organizations that consolidate debts for affordable costs. These credit counseling agencies negotiate more favorable terms with creditors, especially credit card companies. They also manage the repayment program and could help you eliminate or at least avoid late fees.
If you qualify, they could enroll you in a debt management program and you could be debt free in less than five years.
Life after Chapter 7
One of the largest advantages of Chapter 7 bankruptcy is that once the liquidation process is completed, the debtor is no longer liable for any debts covered under the case. Creditors are required by law to cease any attempts to collect on these accounts.
Also, in Chapter 7 cases, the discharge order generally comes early in the case, an average of 60 to 90 days after the motion is initially filed with the bankruptcy court.
Besides the obvious disadvantage of losing possessions that one might hate to give up, debtors who go through Chapter 7 also face long-term damage to their credit reports. Bankruptcies remain listed as long as 10 years, during which the debtor may find it difficult to obtain additional credit.
Despite these problems, a Chapter 7 bankruptcy may be the only real option for many debtors who are unable to pay what they owe. Lawyers who specialize in this type of law can tell them what to expect in court and help them start a new financial life.