When to File a Chapter 7 Bankruptcy

What is a Chapter 7 Bankruptcy?

The filing of a petition under Chapter 7 of the U.S. Bankruptcy Code can be a powerful tool for individuals looking for relief from debt collection efforts. Individuals burdened with consumer and business debts are able to receive an order from the Bankruptcy Court discharging their payment obligations on most debts. Bankruptcies under Chapter 7 are referred to as "liquidation" and "fresh start" bankruptcies. While the ability to obtain a discharge of most or all of your debt is a great benefit, it does not come without strings attached.

Non-Dischargeable Debts Under Chapter 7

Under Chapter 7, there are certain debts that may not be discharged. These debts include domestic alimony and child support obligations, certain types of taxes, judgments, fines and penalties that result from fraud or crimes of moral turpitude, debts improperly listed in the bankruptcy petition, condo association fees, and others. While a Chapter 7 discharge removes your individual obligation to pay a debt, debts secured by your property can still be enforced through judicial and non-judicial means, including foreclosure, if the property is not exempt from seizure.

The Financial Means Test

If your debts consist primarily of "consumer" debt obligations, you will have to qualify for a Chapter 7 bankruptcy filing under the "financial means test." "Consumer debts" are those debts incurred for personal, family, or household purposes. If the majority of your debts were incurred in connection with business purposes, you do not have to qualify under the means test. Under the means test, your annual household income (including income from a non-filing spouse) is compared against the average household income in your state of residence. The final amount used to determine your eligibility consists of the total household income after all allowable deductions, and is based on the number of people in your household.

Should you file a Chapter 7 Bankruptcy?

While a Chapter 7 bankruptcy can provide one of the most comprehensive, fast and cost-efficient ways to obtain debt relief, it is not always the best choice. Deciding whether to file a Chapter 7 bankruptcy is unadvisable without first weighing the risks, benefits, and consequences. Do you qualify under the means test? Are any of your assets non-exempt and subject to seizure by the bankruptcy trustee? How much of your total debt is dischargeable? Will a bankruptcy affect your employment status or hinder your ability to operate an ongoing business? Have you recently made any questionable purchases, paid off certain creditors to the exclusion of others, or transferred property out of your name?

Who Should File a Chapter 7 Bankruptcy?

Good candidates for a Chapter 7 bankruptcy are individual debtors who either don't own a home or have low equity in their home, and multiple unpaid accounts that are either seriously delinquent or defaulted and charged off. A Chapter 7 bankruptcy offers a "fresh start" to debtors who are overextended with income that is insufficient to meet their existing financial obligations. All assets the debtor wishes to keep need to be exempt from seizure under federal or state law. Timing is also important. The right time to file a Chapter 7 bankruptcy is when it will provide you with the greatest benefit with the least amount of risk or damage to your credit. Deciding whether a Chapter 7 is the right choice and whether this is the right time to file is best made with the help of a knowledgeable attorney.