Is Chapter 7 Bankruptcy the Right Option for You?
Before filing for Chapter 7 bankruptcy, review Chapter 7 bankruptcy information to determine eligibility. Because Chapter 7 wipes away debt, not every debtor qualifies. Even if eligible, Chapter 7 may be the wrong choice. Consider the following Chapter 7 bankruptcy information to determine whether it is the most appropriate option.
See Chapter 7 Bankruptcy Rules Overview and Who Can File for Chapter 7 Bankruptcy? for additional information.
You Are Judgment Proof
Being judgment proof means that the debtor has property that is exempt from collection, or does not have enough money or nonexempt property to satisfy creditors that obtain a court judgment. When a debtor is judgment proof, filing for bankruptcy may be unnecessary since creditors would be unable to collect a debt from an insolvent debtor. A creditor, for instance, cannot collect Social Security income or sell exempt property to satisfy a judgment.
You Made Fraudulent Charges on a Credit Card
When a debtor files for bankruptcy, creditors can object to a discharge of debt if the debtor engaged in fraudulent behavior such as providing false information on a credit card application or incurring debt without the intent to repay it. A bankruptcy court will consider the following when evaluating fraud:
- The time between the credit card charges and filing for bankruptcy
- The recent purchase of luxury items over $500
- The recent withdrawal of large cash advances
- Multiple charges made on the same day
- The debtor's employment status
- A sudden change in buying habits
- The debtor's financial condition at the time of the charges (for instance, whether debtor could pay the minimum monthly payment)
In order for a creditor to object to the discharge of a debt, it is necessary to file a request with the bankruptcy court. If the creditor fails to make this request or the court determines that the debt was not fraudulent, the court may discharge the debt.
You Received a Previous Bankruptcy Discharge
A debtor that has received a Chapter 7 bankruptcy discharge within the past eight years or a Chapter 13 bankruptcy discharge within the past six years is ineligible for Chapter 7.
A Previous Bankruptcy Case was Dismissed
A debtor is ineligible for Chapter 7 if the court dismissed a previous Chapter 7 or Chapter 13 case within the previous 180 days due to the debtor's violation of a court order or the debtor's request for dismissal after a creditor asked the court to lift an automatic stay.
Too Many Debts Will Survive Bankruptcy
Some debts under Chapter 7 survive a bankruptcy discharge. This means that the debtor still has personal liability for those debts.
The following types of debts outlive Chapter 7 bankruptcy:
- Child support payments
- Recent taxes (less than three years past due)
- Student loans
- Judgments for auto accidents involving drunk driving
- Trust fund taxes
- Criminal fines or restitution
- Debts incurred for paying back taxes
The following debts may survive Chapter 7 bankruptcy if a creditor challenges the discharge:
- Debt from willful and malicious injury to a person or a person's property
- Debt from a breach of a fiduciary duty
- Debt from embezzlement
- Debt incurred to purchase luxury items
- Debt incurred from fraud
You May Lose Valuable Property
It is important for a debtor to determine how much property they can keep in a Chapter 7 bankruptcy. Under Chapter 7, the bankruptcy trustee will sell nonexempt property to pay creditors. Consequently, if a debtor will lose most property that they would like to keep, filing for Chapter 13 or using another debt relief alternative may be more appropriate.
In most states, a debtor may keep exempt property, such as:
- A certain amount of equity in a home or motor vehicle
- Necessary and inexpensive clothing
- Jewelry valued at less than a certain amount
- Life insurance up to a certain value
- Tools for a trade or profession
- Public benefits, such as welfare, unemployment benefits, and Social Security benefits
- Household appliances
In most states, a trustee may take the following nonexempt property:
- Expensive musical equipment
- Stamp collections
- Family heirlooms
- Bank accounts
- Boats and airplanes
In many cases, a debtor may keep nonexempt property by paying the trustee the value of it or by exchanging equally valued exempt property for nonexempt property. Sometimes, a debtor can keep nonexempt property if the trustee decides that its value is not enough to justify the trouble of selling it.
You May Lose Your Home
A debtor may have to give up their home in a Chapter 7 bankruptcy even if their mortgage is current. In most circumstances, a trustee will choose to sell a home if the available equity exceeds the owner's homestead exemption, or the amount of a homeowner's equity that a state protects. If the trustee sells a debtor's home, the proceeds will be used to pay the mortgage lender, liens, the expenses generated from the sale, taxes, and unsecured creditors. If a trustee is incapable of generating enough money from selling the home, the trustee will not sell it.
Chapter 13 may be a better option for a debtor that would like to keep their home. Instead of repaying creditors with the proceeds from the sale of a home, a debtor can pay creditors through a court-approved repayment plan.
A Cosigner Will Be Responsible for the Debt
When a debt is a joint obligation, such as a car loan, a Chapter 7 bankruptcy will not eliminate the debt. A Chapter 7 will discharge the debtor's personal liability for the debt, but the cosigner remains responsible for paying it. Consequently, the creditor may attempt to collect the debt from the cosigner.
You Qualify for Chapter 13 Bankruptcy
Even if a debtor qualifies for Chapter 7, paying creditors in a Chapter 13 repayment plan may be a better alternative, especially if most debt is ineligible for discharge or the debtor will lose valuable property. A Chapter 13 allows the debtor to keep property, but also requires the debtor to repay unsecured creditors an amount that is at least the value of nonexempt property. While most debts are ineligible for discharge, certain debts, such as debts created from paying nondischargeable tax debt, are eligible for discharge under Chapter 13.