Chapter 7 Bankruptcy Laws

2007-03-08 10:33:40

( Legal )



What is Chapter 7 Bankruptcy?

Being bankrupt is a situation wherein you or your business no longer has adequate income sources to service your financial obligations and expenses.

There are several bankruptcy chapters under American laws. Chapters 11 and 13 allow you or your business to declare bankruptcy, but also to undergo reorganization or restructuring of your debts.

Under Chapter 7 bankruptcy laws, you will liquidate or sell off most of your assets to pay back your obligations. It means you will cease any business operations and close shop. Most cases of business or individual bankruptcies in the country are of this type.

How to File for Chapter 7 Bankruptcy

Whether business or individual, you need to file for Chapter 7 bankruptcy at a federal court.

Once you have filed for bankruptcy with the court, you need to notify your creditors about this within ninety days. The bankruptcy record also becomes a part of your credit history for at least ten years.

A board of trustees will take charge of all your assets, to determine which will be sold off or which ones you are to keep. Under Chapter 7 bankruptcy laws, you may be able to keep a part of your property as exempt from debt, and the maximum allowable exemption depends on which state you are filing your bankruptcy case. An exemption on your home, also known as homestead cap, is especially important in case you currently live in a home with your dependents.

Some of your obligations, particularly credit card balances and other unsecured debts, may be exempt from claims under Chapter 7 bankruptcy laws, and may be cancelled. Again, caps of exemptions depend on the state and the type of liability.

However, if your bankruptcy was a result of crime, violence or fraud, the court can declare all exemptions as void.

You will also undergo a means test to determine if you really qualify for bankruptcy. All your possible means of income, excluding social security benefits, are reviewed and compared to the state's median income levels for businesses or individuals. This is to prevent you from abusing your rights to file bankruptcy just to avoid paying your debts.

Important Advice to the Debtor

If you are seriously considering Chapter 7 bankruptcy filing, be sure to review the provisions under this law carefully. Consult a good lawyer who will explain all the details to you.

Make a list of all your debts and properties, and their amounts as well. This will give you an idea of how much exemptions you may be able to obtain, and which debts you may be able to write off.

In recent years, bankruptcy provisions have become tougher for the debtor. Exemption caps are much lower compared to a few years ago, and means tests have also become more stringent. It also takes much longer to file under Chapter 7 bankruptcy.

Instead of filing Chapter 7 bankruptcy, you may be better off working out a debt restructuring plan that will be feasible for both you and your creditors.


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