Chapter 7 Bankruptcy
Chapter 7 is one of the six bankruptcy chapters encompassed by the U.S. Bankruptcy Code. This chapter is available to individuals, business partnerships, corporations, and other business entities who qualify for protection through the court.
Obtaining debt relief through Chapter 7 is not as simple as it used to be. Reason being, new bankruptcy laws that took effect in 2005 require debtors to repay a portion of their debts by making restitution to the court using Chapter 13 payments.
Debtors must meet certain eligibility requirements before they are granted permission to seek financial help through Chapter 7. Due to the complexities of Chapter 7, debtors should obtain legal counsel from a qualified bankruptcy attorney.
Standard protocol for filing bankruptcy involves filing a petition through the district court where the debtor resides or conducts business. Debtors are required to provide the court with detailed list of income and expenses, assets and liabilities, tax returns or tax transcripts.
If debtors do not have copies of required tax returns they must submit a 4506 tax form to the IRS. It can take up to 60 days to receive tax transcripts, so debtors must be proactive in obtaining their records prior to filing bankruptcy petitions.
Individuals seeking protection under Chapter 7 are required to obtain credit counseling through an agency approved by the U.S. Trustee. A certificate of completion is required before the court will approve the petition and discharge debts.
Chapter 7 is referred to as liquidation bankruptcy because debtors are not allowed to keep assets used as collateral to secure a loan. If debtors want to retain assets they are required to reaffirm the debt before the court discharges debts.
Under federal bankruptcy laws, certain assets are exempt from bankruptcy. These exemptions vary by state, so debtors should obtain legal counsel prior to filing a schedule of exempt property. A good source for locating state bankruptcy exemptions is TheBankruptcySite.org.
Once Chapter 7 petitions are filed, an estate is created. The estate becomes the legal owner of all property owned by debtors. Once debts are discharged ownership of remaining assets is returned to debtors. Payments owed to creditors are paid using nonexempt property held in the estate.
The average duration of Chapter 7 bankruptcy is 4 months; however, the blemish remains on credit reports for up to 10 years. Individuals who enter into personal bankruptcy must become highly proactive in rebuilding credit. The simplest ways to begin is by paying all bills on time and avoid obtaining credit cards and unsecured loans. Debtors cannot obtain debt help using bankruptcy for 8 years after debts are discharged. If they get into financial trouble again they will have limited resources for obtaining help.
Filing bankruptcy should be the last resort because the consequences are severe. Debtors should research bankruptcy alternatives such as credit counseling, debt consolidation, or debt settlement to determine if these options can provide suitable relief.
We invite you to learn more about bankruptcy and available alternatives by viewing our bankruptcy articles. We provide extensive information about each bankruptcy chapter, along with resources for obtaining debt relief.
Published on February 04, 2011 at 10:00 AM