Chapter 7 bankruptcies clear all debts eligible for discharge, allowing the petitioner to walk away from them forever. For those with large amounts of dischargeable debts, Chapter 7 often provides more advantages than Chapter 13.
A bankruptcy attorney helps determine the type of bankruptcy to file for.
In a Chapter 7 bankruptcy, the courts require debtors to liquidate certain assets and use the proceeds to pay a portion of outstanding debts. The court then discharges remaining eligible debts, leaving the debtor free of all but legally non-dischargeable financial obligations.
Because Chapter 7 requires liquidation while eliminating many types of debts, the legal profession often refers to them as “liquidation” or “fresh start” bankruptcies. In essence, Chapter 7 filers start their financial lives again except for non-dischargeable liabilities.
For debtors with few assets and overwhelming obligations, Chapter 7 usually provides more benefits than Chapter 13.
The Benefits of Chapter 7 Bankruptcy
The completion of a Chapter 7 results in many advantages for the petitioner, including:
● Discharge of Most Unsecured Debts
● Automatic Stay
● Voluntary Reaffirmation of Selected Secured Debts
Most Non-Secured Debts Are Dischargeable
Secured debts allow the creditor to seize property when the borrower defaults on the loan. For this reason, lenders can repossess vehicles and foreclose on homes. The property purchased with the loan proceeds serves as collateral.
Unsecured debts have no collateral. Therefore, though the lender can report delinquent borrowers to credit bureaus and petition the courts for a civil judgment, it has no right to repossess property; however, if it receives a civil judgment, it can take adverse actions through the court, such as wage garnishments, bank levies, and forced asset sales.
Examples of unsecured debts that can be discharged in bankruptcy include credit cards, personal loans, and credit lines, except second mortgages.
Automatic Stay
From the moment of filing, petitioners gain automatic stay protection. This court order makes it illegal for any creditor to engage in collection activity. The automatic stay applies to all dischargeable and non-dischargeable debts. When the court discharges the case, the non-dischargeable debts become eligible for collection.
For this reason, petitioners must budget for the payment of non-dischargeable debts, such as student loans. Chapter 7 bankruptcies take approximately four months, and the debtor must either pay the non-dischargeable debts during this time or makeup missed payments upon the case’s conclusion.
The automatic stay stops all adverse creditor actions, including vehicle repossessions, foreclosures, and evictions. If the debtor decides against keeping a vehicle, home, or apartment, he or she can continue using the property while the case remains open but must relinquish it at the end of the case.
Voluntary Reaffirmation of Selected Secured Debts
The reaffirmation process allows debtors the choice to keep property on which they owe money. To take advantage of this provision, the debtor completes paperwork that excludes specified liabilities from the Chapter 7. The petitioner then keeps the property but still owes the entire balance.
For example, a petitioner might owe $15,000 on a vehicle valued at $12,000. However, since the car is in good working order, the petitioner wishes to keep it rather than take out a loan for a new vehicle at a post-bankruptcy penalty rate. In this case, the petitioner still owes the $15,000 and must continue making payments while the bankruptcy case is open or cure any deficiency once the court discharges the case.
If the debtor owes much more than the car is worth or continued payments present a hardship, reaffirmation may be a poor choice. Instead, discharging the vehicle note and buying a more affordable vehicle will better help the petitioner’s financial situation.
Disadvantages of a Chapter 7 Bankruptcy
Though a Chapter 7 can vastly improve a petitioner’s finances, it cannot correct every situation of excessive indebtedness and comes with some disadvantages, including the following:
Some Debts Survive Chapter 7
The law excludes certain debts from Chapter 7 bankruptcy discharge, including:
● Student Loans
● Child Support
● Certain Taxes
● Some Civil Judgments
You May Have to Sell Your Home
Bankruptcy law allows debtors to keep only a small amount of home equity. If the equity in your house is substantial, the court will likely force its sale and use the proceeds to pay creditors. In that case, a Chapter 13 bankruptcy—which allows you to restructure debt and retain valuable property—could be the appropriate choice.
You May Have to Surrender Valuables
The law allows you to retain most personal property, such as furniture, but limits the dollar amount of valuables you may keep. For example, jewelry, collectibles, and high-value objects may have to be surrendered.
Chapter 7 bankruptcy allows those with overwhelming debt a new lease on their financial lives. Because it wipes the slate clean of dischargeable debts, many petitioners enjoy a more stable and secure financial future after Chapter 7. While not all obligations are dischargeable, Chapter 7 wipes away many types of expensive loans, saving debtors from the cycle of compounding interest and ballooning balances.
Personal Bankruptcy May be Necessary
It’s never too late to regain control of your life beginning with your finances. In order for this happen, filing for bankruptcy may be necessary. Trust the bankruptcy lawyers at Hines Law in Massachusetts to help you get back on track. For 20 years, our bankruptcy firm has been providing debt relief options through proper bankruptcy filings with sound representation and advice.
We specialize in Chapter 7 and Chapter 13 and will help you decide which option is best for you. If you have questions or want to learn more, contact our bankruptcy law firm for a Free Consultation.