Debt Management Tip: What Is Chapter 7 Bankruptcy?

Sometimes a debtor gets so far underwater that they may be forced to consider filing for bankruptcy.

This is always a last alternative; it remains on one’s credit report for at least seven years  and can make it more difficult to buy or even rent a home, to buy a car, to apply for any kind of credit, et cetera.

The two most common types of bankruptcy are Chapter 7 and Chapter 13 bankruptcy. Today we’re going to talk about Chapter 7 bankruptcy.

With Chapter 7 bankruptcy there is no repayment plan. Any assets that the debtor owns that are not exempt – and this varies from state to t state – are sold off to repay debtors and most debts are wiped clean. Assets could include television, computer, car, furniture, clothing, house, bicycle, jewelry…there is a long list of what may be seized and auctioned off.

After Chapter 7 bankruptcy the debtor still is likely to owe income taxes, student loans, alimony, child support, and certain court judgments including injury caused by drunk driving.

While it may seem ideal to wipe away all of one’s debts and start fresh, Chapter 7 bankruptcy is not a perfect solution for many people.

And in fact, some people may find that their income is too high to qualify for Chapter 7 bankruptcy, in which case they would need to file for Chapter 13 bankruptcy, which requires a five year repayment plan.

The judge will look at numerous factors when deciding whether to allow the filing of a Chapter 7 bankruptcy. They do not want people to run up large amounts of consumer debt, such as buying expensive toys like big screen televisions, boats, et cetera – and then attempt to wipe out their obligations with a bankruptcy.

Some mitigating factors would be unemployment, medical bills, disability, et cetera. There certainly can be legitimate reasons why a person would have to file for Chapter 7 bankruptcy.

It is up to the bankruptcy judge as to whether he will allow the filing of a Chapter 7 bankruptcy plan.  The judge has the option of converting the case to a Chapter 13 bankruptcy or dismissing it altogether.

Before filing any type of bankruptcy it would make sense to consult with a bankruptcy attorney to see which type of bankruptcy is most appropriate to file, or whether there are better alternatives than a bankruptcy filing.

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