Bankruptcy: Chapter 7
I hear that Chapter 7 is the new hotness. Is that true?
Um, no. Chapter 7 is what a lot of people think of when they think about bankruptcy. They hear about it in the news or are told about it by a friend, and it sounds like a miracle cure that takes all your debt away and leaves you clean and crisp with no worries whatsoever. But that’s not quite the case. Chapter 7 is powerful. It can get rid of a lot of debt. But there are also a lot of restrictions, pitfalls, and requirements that are part of chapter 7. And you need to know IF it will work for you and HOW it will work for you.
Chapter 7 is called the “liquidation” chapter, meaning you start with the idea that your stuff can be taken and sold to pay off your creditors. Doesn’t sound so hot now, does it? In reality, though, most people filing for chapter 7 don’t have enough stuff to sell because the law allows you to keep a certain amount of your things. But even so, in order to protect your things you need to navigate the waters of chapter 7 very carefully. And if you do it right, not only can you usually keep all your stuff, but at the end of the day, a lot of your crushing debt can be wiped out!
How can chapter 7 help?
First off, the automatic stay will usually go into effect as soon as you file for bankruptcy. This means that your creditors must stop trying to collect money from you. Phone calls stop, garnishments stop, lawsuits stop. Basically every collection activity against you stops and gives you a chance to breathe. (You might notice that I didn’t mention that the repossession of your car or the foreclosure on your house stop. Technically they do, but if you are facing these sorts of issues, will likely be your best option. I discuss that down the page).
During the break that is afforded you by the automatic stay, you continue to make payments for ongoing expenses. This includes things like food and lights, rent and car payments. Also during this period, the Trustee will examine your situation and determine if you own anything not protected by law that they can sell to pay off some of your debt. And if not, then your case is eventually completed and you receive a discharge of unsecured debt.
Now here’s where the heart of the matter lies. If your debt problems are centered wholly or mostly around unsecured debt, then chapter 7 might be a good option. Unsecured debt is essentially any debt not tied to an object, or not considered priority debt (priority debt is thing like taxes and child support). For instance, your car loan is tied to your car, that is, it’s “secured” by your car; if you don’t pay your car note, the car company can come pick it up and sell it to pay back the loan. Unsecured debt, however, is not secured by anything. Unsecured debt usually includes things such as credit cards, medical bills, bank fees, old landlords or old repossessed vehicles, those sorts of things. And this type of debt is a great burden to many people I see. They get sick and rack up medical bills, or are out of a job for a while and depend on credit cards more. The crushing weight of it all can be a bit too heavy sometimes, and chapter 7 can help relieve that by wiping away that sort of debt.
I thought bankruptcy would get rid of tax debt?
It can, but generally only in chapter 13 where you end up repaying the debt. If you have tax debt, you can still filed for chapter 7, but it won’t be discharged. You will need to work that debt out directly with tax authorities. This also applies to domestic support obligations, such as child support or alimony.
How was my friend able to file for bankruptcy and didn’t have to do X or pay Y debt?
Honestly, I don’t know. Every case is different. I know I keep saying this, but it’s important to understand. There are so many facts in each case, and if just one of those facts is different from the facts of your case it could change the outcome.
For instance: how much stuff do you own, how valuable is that stuff, what bank do you use, how much debt do you have, what type of debt is it, how do you want to handle that debt, how much money do you make, are you married, how much does your spouse make, do you have kids, what are your expenses, are you receiving government support, can you sue someone, have you paid any family members recently, do you have life insurance, what type of life insurance….etc., etc., etc.
Get my point? You need to know how bankruptcy will affect YOU and YOUR situation. Only then can you really make an informed decision and get the fresh start you’re looking for!