The Top Ten Reasons To Choose A Chapter 7 Bankruptcy
Bankruptcy is a powerful tool for restructuring personal finances, discharging oppressive debt, and granting the “poor but unfortunate debtor” a fresh start. While there are several different methods for filing bankruptcy found in the various chapters of the Bankruptcy Code, the most popular is a liquidation bankruptcy found in Chapter 7.
If you need a refresher on Chapter 7 or just some common knowledge, simply follow this link for the basics.
It’s Time to Start Fresh
A Chapter 7 is an “erase-your-debts-and-start-fresh” bankruptcy. In a Chapter 7, non-exempt property is taken and sold to pay creditors. Any debt that is not paid is discharged, as long as it has not been excluded by law or by the bankruptcy court, such as a child support debt.
There are many benefits to Chapter 7, so today let’s look at some of the best:
No. 10: Reaffirmation
If you’re in debt, Chapter 7 requires you to either pay for or return property that was used as collateral to secure payment of your debts.
Since many debtors desire to keep property after bankruptcy, such as a house or car, the Bankruptcy Code allows the debtor and creditor to execute a reaffirmation agreement and continue the debtor’s financial obligation after bankruptcy.
In other words, the debtor agrees to continue to owe, and the creditor agrees to not repossess the collateral.
A reaffirmation agreement (read more about reaffirmation agreements here) is often an opportunity for the debtor to negotiate for more favorable terms with the creditor.
For instance, a debtor and creditor may execute a reaffirmation agreement and agree to modify the term of a loan, or the interest rate, or even reduce principal. The reaffirmation agreement acts as a new contract and obligations under the previous contract are discharged.
No. 9: No proof of claims (usually)
Creditors in a Chapter 7 case are only paid when the trustee is able to collect assets from the debtor. This is called an “asset case,” and it is the only time when creditors are able to file claims. In “no asset cases,” no unsecured creditors are paid and there are no claims filed. For a lot of people going through debt problems, this is great news.
No. 8: Future income is not part of the bankruptcy estate
Chapter 7 is only one type of bankruptcy relief. In Chapter 11 and 13 cases, the debtor makes monthly payments that are distributed to creditors.
The source of these payments is typically the debtor’s income. In fact, a Chapter 13 bankruptcy is also commonly called a “Wage Earner’s” bankruptcy.
All of the debtor’s disposable income must be used to repay creditors in these plans, and future income is property of the bankruptcy estate.
Income is not property of a Chapter 7 bankruptcy estate. This means that income received after the bankruptcy filing (such as an employment bonus) is not expected to pay pre-bankruptcy debts, so long as the debtor was not entitled to receive it before the bankruptcy case was filed. The last sentence is important. One must make sure they weren’t entitled to the money prior to the case being filed.
Overall, this provides the debtor a great deal of certainty and a better chance at a quick financial recovery.
No. 7: Redemption
In a Chapter 7 redemption, the debtor pays a secured creditor the fair market value of collateral used for a loan, the debtor keeps the property lien-free, and any remaining debt is discharged. Redemption is commonly used to purchase an upside-down vehicle from a creditor. For instance, a vehicle with a $9,000 debt may only be worth $5,000.
By using the Chapter 7 redemption process, the bankruptcy court will order the property redeemed for $5,000 and discharge the remaining $4,000.
Redemption requires the debtor to make a lump-sum payment to the creditor. If the debtor is unable to pay a lump-sum payment, there are lenders available that make redemption loans. These loans are made at a high interest rate, but result in a lower monthly payment for the debtor.
No 6: Avoid non-possessory, non-purchase security interest
A Chapter 7 debtor is able to strip away a secured lien on household property, if the property was already owned by the debtor when it was pledged as collateral, and the debtor is otherwise able to use exemptions to protect the property.
The most common example of this is household furniture used as collateral to secure a personal loan, usually through a finance company. This is a common and useful bankruptcy tool to protect furniture and household items from predatory lenders.
No. 5: No monthly payments to trustee
Unlike Chapter 11 or 13 cases, there is no repayment plan or monthly payments during a Chapter 7 bankruptcy.
No. 4: Case is completed in four to six months
No asset Chapter 7 cases are typically discharged and closed within four to six months. Chapter 13 cases last a minimum of three years to a maximum of five years. Chapter 11 cases may last even longer! Of course your bankruptcy attorney will advise you one which chapter to file, but in the end, if you can, going through a chapter 7 takes much less time.
No. 3: Exemptions!
There’s nothing like exemptions! Statistically, only one debtor in twenty loses any property during a Chapter 7 bankruptcy case. Keeping property is a matter of accounting for property and utilizing federal or state exemption laws to protect the property from creditors and from the bankruptcy trustee.
Careful bankruptcy planning and adept use of legal exemptions can minimize any risk of losing property.
No. 2: Automatic Stay
Stop the creditor calling! All consumer bankruptcy cases get the benefit of the Automatic Stay. The Chapter 7 Automatic Stay takes effect immediately upon filing a bankruptcy case and protects the debtor from creditor harassment, lawsuits, and collection actions.
The Automatic Stay is a court-ordered temporary injunction that lasts the duration of the bankruptcy case (or until modification or discharge) and is directed at creditors with pre-bankruptcy debts.
This injunction is very broad, and has very few exceptions. Violation of the Automatic Stay injunction is punishable by contempt of court, which may include a fine and an award of attorney fees.
No. 1: Chapter 7 discharge
The Chapter 7 discharge is the heart of the “fresh start” promised by the federal bankruptcy laws. The discharge is a permanent injunction that forever prohibits creditors with pre-bankruptcy debts from attempting to collect from the debtor.
Most unsecured debts are dischargeable at the end of a Chapter 7 bankruptcy, including credit cards and medical bills. Creditors who wilfully violate the bankruptcy court’s injunction may be penalized by contempt of court.
The Take Home
As usual I’m going to advise you to consult with your local bankruptcy lawyer about which chapter is the best to file for your case, but if you can use Chapter 7 then do so, in the end you’ll retain more and lose less, and all in a matter of time that is much quicker than filing in the other chapters.
