Chapter 7 is often referred to as liquidation bankruptcy because debtors are required to liquidate assets to pay outstanding debts. In the past, this personal bankruptcy chapter was the preferred choice because it wipes out debts and allows debtors to have a fresh start.
Today, Chapter 7 is only offered to debtors who do not qualify for Chapter 13 under regulations set forth in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. These new bankruptcy laws were enacted to reduce frivolous bankruptcy filings to eradicate credit card debt and personal debts caused by reckless spending.
The rules of BAPCPA require debtors to petition the court for debt relief under Chapter 13 unless they earn less than their states' median income levels. The courts use a financial tool known as the 'means' test to calculate earnings.
Those earning equal to or greater than median income are required to develop Chapter 13 payments which can extend for no longer than 5 years. Debtors earning less might be allowed to submit Chapter 7 petitions if they meet BAPCPA qualifications.
Filing personal bankruptcy is a decision that should be weighed carefully. Both Chapter 7 and Chapter 13 cause serious harm to debtors' credit ratings that can take years to recover from. Although bankruptcy can provide debt relief, it can lead to additional problems down the road.
For example, once a bankruptcy petition is filed through court, debtors often witness their credit scores decline by upwards of 100 points. When FICO scores decline, debtors will have difficulty qualifying for credit in the future. Those fortunate enough to secure financing will be subjected to higher rates of interest because interest rates are based on credit scores.
Bankruptcy can also affect housing and employment opportunities. In today's society, credit scores are reviewed to determine a person's creditworthiness and trust factor. Unfortunately, employers and landlords perceive individuals with credit problems as a potential risk.
Many believe if a person has money problems they probably have others problems in their life that could interfere with repayment of debts or their ability to perform a job. While this is not always the case, bad credit scores reflect poorly on the person and they are often bypassed for a person with good credit.
Individuals granted permission to file Chapter 7 bankruptcy should commit to immediately engaging in credit repair strategies. Most debtors will not qualify for credit immediately after bankruptcy, but they can begin repairing credit by paying bills on time and in full each month. It is best to avoid applying for credit cards and secured loans for at least one year after bankruptcy. Once credit is obtained, it is crucial to meet payment obligations. Otherwise, debtors end up where they started, but with fewer options for debt help.
BAPCPA prohibits debtors from filing bankruptcy for at least 8 years from the date of the first bankruptcy petition. Therefore, it is crucial to stay out of debt once debts are discharged through Chapter 7.
Prior to submitting a bankruptcy petition it is best to research bankruptcy alternatives to determine if these options can provide debt relief without the severe consequences. We encourage you to review available debt help options in our personal bankruptcy article library. Here you'll find extensive information on Chapter 7 and Chapter 13, along with resources for obtaining debt relief.