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Chapter 7 Bankruptcy

Chapter 7 is the bankruptcy provision that individuals use most frequently. Chapter 7 is known as liquidation bankruptcy whereas chapters 11 and 13 involve reorganization of debts. Liquidation bankruptcy means that a debtor turns over all non-exempt assets to a bankruptcy trustee. The trustee then sells off all of the debtor’s non-exempt assets to pay off objecting creditors to the fullest extent possible. The remainder of the debt that cannot be paid off is discharged.

What happens to an individual’s assets after filing for chapter 7 bankruptcy

Under chapter 7 bankruptcy, the individual’s assets are completely liquidated to pay creditors and cancel all remaining debt. Chapter 7 discharges all non-priority, unsecured debt. With secured debt, an individual can either (1) reaffirm the secured debt and keep the secured property; or (2) surrender the secured property and discharge the secured debt.

Eligibility requirements for chapter 7 bankruptcy:

The eligibility requirements for a chapter 7 filing are as follows:

  1. The debtor is an individual, partnership, or a corporation or other business entity;
  2. An individual debtor who is above the median income for his/her state must pass the means test;
  3. An individual cannot file for bankruptcy if during the last 180 days, a prior bankruptcy petition was dismissed due to the debtor’s failure to appear before the court or comply with court orders, or the debtor voluntarily dismissed the case.
  4. The debtor must have received credit counseling from an approved credit counseling agency within 180 days before filing. Any debt management plan developed during the counseling process needs to be disclosed to the court.

Chapter 7 Bankruptcy Exemptions:

Individual debtors who file for chapter 7 may protect certain personal property under the Bankruptcy Code and the laws of the debtor’s state. Some important federal exemptions include: equity in your primary residence, the amount depending on the debtor’s state; one automobile up to $3,225; household items (i.e. appliances, clothes, furniture), up to $10,775 and $525 maximum per item; jewelry and heirlooms, up to $1,225; life insurance; alimony and child support; and retirement funds.

What is a reaffirmation agreement and what are requirements

A debtor who wishes to keep certain secured property, such as a car, may request a reaffirmation agreement. A reaffirmation agreement is a voluntary agreement between the debtor and the creditor where the debtor “reaffirms” all or portion of a debt which would normally be discharged in bankruptcy. Under such an agreement, the debtor chooses to remain legally obligated to pay the debt in question. In return, the creditor cannot repossess or take back the property as long as the debtor continues to make the payments.

The debtor must sign a written reaffirmation agreement and file it with the court before the court enters a discharge. The reaffirmation agreement contains a number of mandatory disclosures, including the amount being reaffirmed and a statement of the debtor’s current income and expenses that proves the debtor has sufficient income to pay the reaffirmed debt. If the debtor is represented by an attorney for the reaffirmation agreement, the attorney must certify that he/she advised the debtor of the legal obligations under the agreement. The attorney must also certify that the debtor voluntarily entered the agreement and that the agreement will not cause undue hardship on the debtor or his/her dependents.

Benefits of Chapter 7 Bankruptcy?

While bankruptcy is a last resort option for many debtors, there are many benefits to filing bankruptcy that can help individuals get a hold of their debts and their lives.

The immediate benefit is that filing a chapter 7 petition will provide you, the debtor, relief from creditors. Creditors are prohibited from harassing you regarding pending debts after the filing of a chapter 7 petition.

The most obvious benefit of a chapter 7 petition comes from a successful filing, when most debts are discharged. Liquidation bankruptcy means that you as the debtor agree to sell most or all of your assets in exchange for a clean slate. Of course certain assets are protected as are certain debts, as discussed above.

Other less obvious benefits include the stress relief from knowing you do not have to worry constantly about the debt that you owe and cannot pay back. Also, you can have assurance that you will no longer have to struggle to pay bills that you cannot afford. Without the threat of creditors and piling debt, you can begin to rebuild your credit score and save money for the future.

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