When it comes to bankruptcy, a debtor has a few options for what type of case they file. Two of the most common are Chapter 7 bankruptcy and Chapter 13 bankruptcy. In the Chapter 7, the debtor’s assets are liquidated, and the money is used to settle their debts. In Chapter 13, a payment plan is created for the debtor, which will bind them to settle their debts in arrears for a period of 3 to 5 years.
Which type of bankruptcy case you choose will depend on your unique financial situation. While most people prefer a Chapter 7 bankruptcy because it discharges their debts, it doesn’t mean that you should immediately go for it.
You first need to determine if Chapter 7 is indeed right for you. To help you make this decision, ask these questions:
1. Are you judgment-proof?
Before you file for bankruptcy, you need to ask yourself first if you’re judgment-proof. To be judgment proof means that your creditors will be unable to collect from you for the reason that you don’t have any property or income to settle your debts.
Before a creditor takes proactive steps to collect what they are due, they will first see if you have enough property to make payments. If you don’t, they can’t collect, so bankruptcy may not be needed in the first place.
Even if you own a piece of property, such as a house, you can still be judgment proof because the home that you use as a primary residence may be exempt under your state’s homestead laws.
On the other hand, if you do have assets that can be liquidated to settle your debts, you cannot be classified as judgment-proof. If this is the case, then there is no barring your creditors from collecting. Your creditors can sue you and obtain a court order to start taking action to collect what they are due.
If you’re not judgment-proof, it’s important that you speak to your bankruptcy lawyer before your case goes to court. That way, your lawyer can conduct measures to file your bankruptcy case before your creditors receive judgment and ensure that you get proper relief.
2. Will Chapter 7 bankruptcy discharge enough debt?
A lot of debtors have a misconception that a chapter 7 bankruptcy will be able to discharge all of their debts and hand them a clean slate to start over financially. However, not all of your debts can be completely wiped out. There are certain non-dischargeable debts that will still exist even after a Chapter 7 discharge.
The non-dischargeable debts include:
- Child support and alimony obligations
- Court judgments involved in DUI cases
- Debts for luxuries
- Income taxes that are less than 3 years overdue
- Student loans – these can, however, be discharged if the repayment will cause the debtor undue hardships
Other types of debts may also become non-dischargeable if a creditor objects to a discharge. These can include, but are not limited to:
- Debts incurred by fraud
- Debts incurred by intentional injury to a person or their property
- Debts incurred from breach of trust, embezzlement, or theft
- Debts arising from divorce or marital settlement agreements.
If your goal is to wipe out any of the debts above, a Chapter 7 bankruptcy isn’t for you, considering that they can’t be eliminated in the first place.
3. Do you have properties you want to keep?
A lot of people are scared of the concept of “bankruptcy” because of the misconception that filing a Chapter 7 bankruptcy case will cause them to lose their house and everything they own. However, that’s not true. Bankruptcy laws are created in a way that protects the debtor and their personal assets. With the exception of non-exempt property, you will be able to keep most of your belongings.
The exempt property, or those you can keep in a Chapter 7 bankruptcy, include:
- Equity in your home as per the homestead exemption
- Household appliances
- Jewelry up to a certain value determined by law
- Life insurance up to a certain value determined by law
- Motor vehicles up to a certain value determined by law
- Necessary clothing
- Necessary household furniture
- Pensions
- Personal effects
- Public benefits in your bank account
- Tools of trade up to a certain value determined by law
- Unpaid but earned wages
So, Is Chapter 7 Bankruptcy for You?
Before deciding to file for Chapter 7 bankruptcy, it’s important to determine if it’s right for you and your financial situation. You should only make decisions that make sense to you financially. Ask yourself these questions to help you determine your next move. It’s also important to speak with a bankruptcy lawyer who can advise you on the best steps you can take.