The majority of all consumer
bankruptcy filings are for Chapter 7. For those in dire financial straits,
Chapter 7 provides a means for a fresh start. Chapter 7 is oftentimes referred
to as liquidation because debtors are required to sell their non-exempt
resources and distribute the proceeds to creditors. While the prospect of
liquidating your property is indeed troubling, the key here is that debtors are
only required to sell non-exempt resources. In many instances this means that
debtors can file for Chapter 7 without losing any assets. Gaining a better
understanding of Chapter 7 bankruptcy will help you determine whether it is
suitable for your circumstances.
Who is a Candidate for Chapter 7 Bankruptcy?
Liquidation can be problematic for
businesses so Chapter 7 is generally most appropriate for individual debtors.
But even among individuals, Chapter 7 is not always the best alternative; Chapter
13 bankruptcy sometimes provides a better remedy to those with a regular
income. It is safe to say, however, that for debtors with little or no
income, Chapter 7 is usually the most suitable type of bankruptcy. The
one limitation is that debtors who have had their debt discharged under Chapter
7 or have completed a Chapter 13 plan within the past eight years cannot
petition for Chapter 7.
Do You Qualify For Chapter Seven?
In determining whether to file for
Chapter 7 you should evaluate your financial situation with a bankruptcy
attorney. Ultimately you must decide whether you have enough debt to
justify filing for bankruptcy. The amount of debt is not as important as
your inability to repay it. Some debtors file for bankruptcy with a
relatively small amount of debt while others wait until they have accumulated
exorbitant amounts of debt before filing. With the assistance of an
attorney, you should evaluate your debt, income, expenses and assets. A
careful examination of this will help you determine whether Chapter 7 is
suitable.
Chapter 7 only discharges certain
types of debt so the first thing to consider is whether filing will discharge
your debts. In most instances, Chapter 7 discharges the following types
of debt:
- Medical bills
- Civil judgments
- Credit card debt
- Unsecured loans
You also need to know which types of
debt cannot be discharged under Chapter 7. The following debts fall into
this category:
- Student loans
- Unpaid taxes
- Alimony
- Child support
- Secured loans such as mortgage and car payments
Because Chapter 7 does not discharge
every type of debt, the real question is whether your dischargeable debt is
high enough to justify filing for Chapter 7. If your debt consists mostly
of student loans and unpaid taxes, Chapter 7 is probably not a suitable
remedy. If your debt consists mostly of credit card debt and medical
expenses, however, Chapter 7 could be very appropriate. As a general
rule, this type of bankruptcy is only suitable if your dischargeable debt
outweighs your assets and you have little chance of repaying the debt.
Your evaluation would not be
complete without also considering your assets. Some assets are exempt
from liquidation, meaning that you can retain them. Other assets must be
surrendered and sold during Chapter 7 to provide creditors with at least
partial payment. In most instances, the following assets are exempt from
liquidation:
- One automobile
- A primary place of residence and the equity in the property
- 401K plans
- Life insurance policies
- Personal effects such as household items and clothing.
Any non-exempt assets can be subject
to liquidation. Debtors with a significant amount of non-exempt assets
must be ready to surrender them if they file for Chapter 7.
The U.S. Bankruptcy Code requires
debtors to disclose all of their monthly income and expenses. In addition
to wages earned, debtors must disclose all other sources of income. The
income and expenses are subjected to a means test. Debtors who pass the
means test are presumed to qualify for Chapter 7. Debtors who do not
qualify may still be able to file for Chapter 13.
How Chapter 7 Works in Arizona
When you file for Chapter 7, an
automatic stay is immediately issued which prevents creditors from collecting
debts and repossessing your property. A trustee is appointed to collect all
non-exempt assets. The trustee then sells the non-exempt assets and divides the
proceeds among your creditors. Not everybody loses their assets – exempt assets
are not subject to forfeiture. Once the bankruptcy is complete all of your
dischargeable debts will be discharged.
If you are concerned about losing
certain assets in a Chapter 7 proceeding, you may be able to sign what is
called a reaffirmation agreement. A reaffirmation agreement essentially permits
you to keep certain property outside of the bankruptcy. By executing a reaffirmation
agreement you can continue to pay down a mortgage or car payment to prevent
forfeiture.
The most difficult part of filing
for Chapter 7 is determining whether it is suitable to do so. An attorney can
help you evaluate your circumstances. After deciding that Chapter 7 is indeed
suitable, the bankruptcy proceeding mostly consists of following the rules
outlined in the U.S. Bankruptcy Code.
