The United States courts created Chapter 7 so individual debtors, partnerships or businesses could have the opportunity to walk away from their obligations to start anew. Once the bankruptcy is final, the debtor is no longer beholden to the creditors. Chapter 7 bankruptcy works best for individuals who have exhausted all other options for repaying debt, have limited or no assets, or have seen a dramatic drop in income.
Two key provisions of the Chapter 7 bankruptcy are the means test and liquidation.
The Means Test
To ensure people do not take advantage of Chapter 7 bankruptcy laws and proceedings, the courts conduct a means test for individuals. In the means test, the court compares the filer's income to the state average to determine if the filer has the means to repay the debt. A Westchester Chapter 7 lawyer can walk a potential filer through the means test to determine if Chapter 7 bankruptcy is the right fit or if a Chapter 13 filing would be more appropriate.
Liquidation
Liquidating assets is probably the most famous — and most feared — aspect of Chapter 7 bankruptcy, which makes it a good option for debtors' with little to no assets. The Chapter 7 bankruptcy requires filers to liquidate all "non-exempt" assets with proceeds going to the creditors. The good news is that most Chapter 7 filers only have "exempt" assets.
Exempt assets include:
- Cars and other motor vehicles, to a specific value;
- Jewelry, up to a certain value;
- Reasonable household goods, furnishings and clothing;
- Tools of the debtor's trade;
- Pensions;
- And public benefits like unemployment insurance or social security.
Non-exempt assets include:
- Second cars;
- Second homes or vacation homes;
- Expensive musical instruments;
- And collections of valuable items.
In some Chapter 7 bankruptcies, debtors may keep their cars or homes if they are current on the payment and have little to no equity in the car or home. But, if the intent of the debtor is to keep a home or stop a foreclosure, a Chapter 13 bankruptcy is more appropriate.
Possible Disadvantages
As with any bankruptcy, a Chapter 7 bankruptcy does have some possible disadvantages. First, filers must liquidate their assets. This aspect of Chapter 7 alone turns many potential filers away. Second, it will take time for debtors to repair their credit scores after a Chapter 7 bankruptcy, which prevents adding more debt but could hinder attempts to rebuild a credit score. Lastly, Chapter 7 bankruptcy alone can't fix problems that led to the bankruptcy in the first place.
However, for debtors struggling under a mountain of debt, who are tired of harassing phone calls from creditors and who need a fresh start, a Chapter 7 bankruptcy can help move them forward. Talk to a Westchester Chapter 7 lawyer for more information about how Chapter 7 bankruptcy can help.