Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes referred to as liquidation bankruptcy. The personal possessions of the debtor can be sold. The proceeds from the sale are applied toward the outstanding debt.

After everything is sold, any remaining debt is forgiven, subject to approval of the bankruptcy court. A bankruptcy is always a negative on your credit report. It remains part of your credit for 10 years and significantly lowers your credit score. Creditors prefer a Chapter 13 to a Chapter 7. With a Chapter 13 you work out a repayment plan with your creditors. But debtors don’t always have the income required to pay their debt. Without the needed income the only option is a Chapter 7.

Chapter 7, as well as the other types of bankruptcy, does not allow all debt to be forgiven. Things like child support, alimony, tax liens, student loans, debts involving fraud, debts resulting from law suits, etc. must be paid. Bankruptcy code was amended in 2005. Debtors are now required to verify they’ve consulted an approved credit counseling agency before filing bankruptcy.

Another change is a “means test“. Your income, compared to the state median income, determines if you abused your finances. If the court feels you incurred credit card debt with no intention of ever paying it back your petition for bankruptcy could be denied.

There are cases of abuse, but many times individuals can’t pay back their debt. Circumstances beyond their control–sickness, divorce, death, job loss–results in lost income. Bankruptcy law was designed to give individuals like this a second chance. Once the bankruptcy petition is filed the creditors can no longer attempt to collect the debt. To file a Chapter 7 the debtor completes paperwork (list of all assets, list of all debts/creditors, financial statement, current income earned), which is filed with the federal bankruptcy court. The court appoints a trustee to the case.

You are allowed to keep certain property (exempt) like your home, car and vital necessities, if you have the income needed to continue making the payments. The trustee decides what items to sell and works with the creditors to determine balances owed. The debtor is required to appear before the bankruptcy judge. All creditors are given the opportunity to respond. After all assets are liquidated and applied to outstanding debt, the judge makes a determination. If they agree with the petition for bankruptcy, the remaining debt, with the exception of excluded items listed above, is discharged. If they don’t agree, the debtor can apply for a Chapter 13.

Filing for bankruptcy is not the end of the world. It takes time to rebuild your credit. You may have to pay cash for awhile or a higher interest rate if granted credit. Most creditors will not lend you money after a bankruptcy until you prove that you have reestablished your credit. The best way to do this is to make all payments on time after the bankruptcy.

Margaret Norton

(photo credit: pfala)

April 8th, 2009 by admin | Posted in Personal | (0)