What Is Chapter 7 Bankruptcy

By Credit Help

Although Chapter 7 bankruptcy provides many people with alternatives to going bankrupt and a new financial beginning, it is not a cure for their financial problems, as this article explains ...

The most common form of bankruptcy is Chapter 7 bankruptcy. Because it provides debtors with a full discharge of their debts rather than a repayment plan, the majority of debtors often choose this option as their financial solution. It is an ideal choice for people who have a huge mountain of unsecured debt that is next to impossible to ever pay off. According to the new codes, though, the bankruptcy court system investigates suspicion of abuse from debtors who opt to completely discharge their debts.

Although Chapter 7 bankruptcy provides many people with bankruptcy alternatives and a new beginning concerning their finances, it is not a panacea for their problems. The courts do not just grant a complete discharge for debts without fully investigating the circumstances surrounding the debt. People who file for a discharge are obligated to undergo a "means test," which is a comparison of the person's monthly income to that of the state's median income. Due to the new law, bankruptcy petitions are subject to greater scrutiny than in previous years and they require the signature of a lawyer. Bankruptcy filings in the past year also affect the status of one's petition according to the new guidelines. This helps the courts to decide if the person is even eligible for a complete discharge.

In addition to these guidelines, the courts also look for abuse of the bankruptcy system. If a person is suspected of abuse, their entire Chapter 7 bankruptcy can be dismissed and the debtor can be forced to make repayment plans to their creditors through Chapter 13 bankruptcy or, worse yet, receive no discharge or protection at all. Among other forms of wrongdoing, abuse of the bankruptcy system normally entails a person running up a large amount of consumer debt in a short period and immediately filing bankruptcy afterwards. The courts will often see this action as an exploitation of the system and refuse your petition to discharge your debts.

Chapter 7 bankruptcy is not the only bankruptcy alternative for a debtor. Other bankruptcy options, such as Chapter 13 bankruptcy, allow the debtor to repay the debts in a 3-5 year repayment plan set up by the bankruptcy courts. The court's trustee assesses the debtor's income and debts and decides on a plan in which the money is taken directly out of the debtor's income for the purposes of paying the creditors. This option is often settled out of court with the creditors and is often used as a means for debtors to save their home from foreclosure.

As with any legal or financial matter, the best thing for a debtor to do before filing for Chapter 7 bankruptcy is to consult with a lawyer. You may be able to avoid bankruptcy or find a bankruptcy alternative. Bankruptcy can have many negative effects on a person's life, so it is vital to completely research the advantages and disadvantages of what it will do for you and your finances. For many people facing the decision, Chapter 7 bankruptcy is the best choice because they have few, if any, repayment options. For others, Chapter 13 is a better choice due to psychological and moral obligations to repay their debts. Whatever the reasoning behind the decision, behavior change is often the most important thing to prevent the predicament from happening again.

Next article: Undergoing Bankruptcy Filings - A Helpful Guide

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