What is Chapter 7?

Posted By: Asim Mohammed
According to the United States Bankruptcy Code there are different “chapters” to file under, chapter 7 and chapter 11 and chapter 13. People have always heard of the chapter 11 on the news for when corporations or businesses are in trouble. One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a fresh start. One of the most common forms of bankruptcy is chapter 7. Chapter 7 governs the process of liquidation under the bankruptcy laws of the United States. Under chapter 7, the bankruptcy trustee will gather and sell the debtor’s assets and uses the proceeds of such assets to pay creditors in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. Also, filing under chapter 7 may result in a loss of property. In order to qualify under chapter 7, debtor may be an individual, a partnership, or a corporation or other business entity. Chapter 7 has different laws for businesses filing to individuals filing. There is a certain process that requires someone to fill out forms in court to people preparing the bankruptcy proceedings and going through the court system.




http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter7.html


http://en.wikipedia.org/wiki/Chapter_7,_Title_11,_United_States_Code


http://www.investopedia.com/ask/answers/190.asp

Don't get trapped by bankruptcy

By Jen Lynch

Myth: I'll just file bankruptcy and start over; it seems so easy.
Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.

I found this on daveramsey.com the 'Truth about Bankruptcy'. I thought it was an appropriate, accurate description. Thanks, Dave. 

So before you jump into the life-changing event that ruins your existence, there are a few important things to consider;

1. Educate yourself- You can file a Chapter 7 or Chapter 13. Chapter 7 (Liquidation) wipes out most of your debts, but you must give up property that is not exempt from seizure by creditors. Chapter 7 also stays on your file for 10 years. Chapter 13 doesn't make you give up any property, but over a period of approximately three to five years (depending on amount of debt and your income) you must pay back creditors with your income. Chapter 13 stays on your file for only 7 years, but basically both stay with you FOR LIFE, because many job and loan applications ask if you have EVER filed, and lying is fraud. (aka Do not pass GO, and hope for a 'get out of jail free' card)

2. Look at alternatives- You may be able to negotiate with your creditors and make an out-of-court settlement if you have a steady income. Debt consolidation loans are another option if you have enough home equity, this is a more dangerous alternative however because you risk more to lose. You can also utilize nonprofit debt counseling services that work with you to improve your financial status. Declaring bankruptcy is a big deal, and often people can address their problems alternatively. 

 
3. Consider what you are eligible for- There are certain requirements for both Chapter 7 and Chapter 13 filings. If you have enough income to repay debts in a Chapter 13 plan, then often you won't qualify for Chapter 7. On the other hand, if you do not have enough income or you have too much debt, you won't qualify for Chapter 13. 

4. Know which debts will or won't be cleared- Bankruptcy clears all unsecured debt, such as credit cards. Some things, like child support and alimony can't be wiped out, you have a responsibility to pay them regardless. Sometimes you can get rid of student loan debt and tax debt, but this is very circumstantial, and you must provide additional testimony/proof to the court. 

5. Find out if you could lose your home or car- If you have a mortgage on your home, you still have to make the payments if you declare bankruptcy. Depending on which you file for, you may or may not lose your house. Chapter 7 is riskier, because if your home or car has a lot of equity, it will be taken and factored in to what you owe. Chapter 13 allows you to keep your house, car etc and make payments through the payment plan. 

6. Know what happens to your cosigner- If you file Chapter 7, your cosigner will get stuck with your debt. Under Chapter 13, they are not held accountable. You must make sure that if you have a friend or family member helping you, that they understand the consequences if you fail to repay what you owe.

Bankruptcy Information

Nolo Article

Dave Ramsey Article

Bankruptcy: Your LAST Alternative

By Kaitlin Lanier

On a personal level, bankruptcy has become a very popular option when debt accumulates. According to the American Bankruptcy Institute, more than 2 million personal bankruptcies, those filed by individuals rather than businesses, were filed in 2003, which is a record number. In fact, since the early 1990s, the number of personal bankruptcies filed has increased at an average of 20 percent per year. However, despite its popularity, bankruptcy should be the last alternative to resolving credit management difficulties. As expected, there are many disadvantages to filing bankruptcy:

• Ruined Credit History: A bankruptcy will appear on your credit record for ten years and may affect your ability to obtain a home mortgage or other credit in the future. This long-lasting impact may outweigh the benefits of debt reduction accomplished through the bankruptcy proceedings.
• Costs: Despite the fact that you are filing for bankruptcy, there are still certain costs that are associated the proceedings. Court costs, attorney’s fees, and trustee’s fees all need to be considered.
• Property repossession: Declaring bankruptcy can result in losing valuable assets or equivalent cash value. You may need to part with your most prized possessions. Also, since you can expect all your bank accounts and credit cards to be closed when you file for bankruptcy, anything you are leasing, such as a car, will be return to its owner.
• Stained social status/hampered life: On a more personal note, declaring bankruptcy can definitely spoil your social status. Also, those who decided to declare bankruptcy may find it extremely difficult to buy or rent a home, acquire insurance, or buy or lease a car. This can lead to a lot of problems, especially not having a safe and secure lifestyle.

Sources:
Personal Finance: Skills for Life by Vickie Bajtelsmit
Avoid Bankruptcy—Myths, Reality, and Alternatives by Debt Consolidation Care
Avoiding Bankruptcy by Jonathan D. Pond

Alternatives to Filing for Bankruptcy

By Michael Collins

When people get into financial trouble, choosing to file bankruptcy is often a way for them to escape their debt. However, there are other avenues that they can take to solve their problems.

Credit card debt is by far one of the most common forms of debt. People will often choose to simply make minimum payments, rather than pay in full every month. This leads to mounting debt, which is further increased by the high interest rates that are charged by the companies, up to over 30% in some cases. There are several ways to alleviate credit card debt without resorting to bankruptcy. Debt settlement is one common way. “In the strictest sense, debt settlement is an agreement between a debtor and a creditor to pay off any remaining debt at a reduced amount. Settlement occurs when a creditor is satisfied that a debtor no longer has the financial ability to repay the debt owed in full.”1 Debt settlement is often worked out by a separate company or group who set up payment plans. The debtor will begin putting money away into an account, from which the creditor(s) will withdraw in order to settle. Creditors will often settle debt if the debtor is considering bankruptcy, because if bankruptcy is filed, it is very likely that the creditor will not be paid at all. Bankruptcy will also severely hurt the credit rating of the debtor.

Mortgage debt is another common form. In order to avoid foreclosure or bankruptcy, debtors may choose to refinance, which is replacing a current mortgage with a new one. This is often done to take advantage of lower interest rates or in order to create a longer payment period with lower monthly payments. Another, more extreme way to avoid bankruptcy is for the debtor to liquidate some of their assets. Much like chapter 7 Bankruptcy, by selling off assets, the debtor can get the money they need to pay off their debt. However, unlike Chapter 7 Bankruptcy, this will not have an adverse effect on the credit rating of the debtor.

While bankruptcy is an option to get out from under debt, there are viable alternatives. These alternatives may be difficult for debtors in the short run, but end up being much better for them in the long run.

References

1- http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Debt-Settlement/

http://www.legalhelpers.com/bankruptcy-alternatives/mortgage-refinance.html

http://www.franklindebtrelief.com/bankruptcy-alternatives.html