Chapter 7 Bankruptcy is Better Known as Straight Bankruptcy

by Dori Tery on June 26, 2013

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy or better known as Straight Bankruptcy, is a more severe type of bankruptcy. Under Chapter 7, the individual who does not have any possibility of repaying debts is given the opportunity to eliminate them and begin again. Exactly what assets you can keep varies from state to state, but your home equity exemption is limited to $125,000 if the property was acquired within the previous 3.5 years.

Under the new bankruptcy reform law of 2005, to qualify for Chapter 7 bankruptcy as opposed to Chapter 13 you must pass a “means test” that attempts to determine if you are earning enough to be able to pay off at least some of your debt. In effect, the major intent of bankruptcy reform is to require people which can afford to make some payments toward their debt to make these payments, while still affording them the right to have the rest of their debt erased. These people must file Chapter 13 as opposed to Chapter 7.

If you make more than the median income in your state, have more than $100 a month of disposable income, or have enough disposable, or have enough disposable income to repay at least 25 percent of your debt over 5 years, then you may have to do a Chapter 13 bankruptcy. In effect, this new bankruptcy law has made it much tougher to file Chapter 7 than it was before. Another change brought about by the new law is that within six months of when you can file for bankruptcy. In effect, this new bankruptcy law has made it much tougher to file Chapter 7 than it was before. Another change brought about by the new law is that within six months of when you can file for bankruptcy you must complete a credit counseling course, the purpose o which is to inform consumers of the consequences of bankruptcy. Then, before any debts are discharged, you must also take a course in personal financial management.

Many People File Chapter 7 Bankruptcy Aftermath of an Illness or Accidents

chapter 7 bankruptcyThe bottom line is that while you will not lose everything, you will have to sell a good portion of your assets in order to satisfy Chapter 7 requirements. Most of your debts will be wiped out, but some will remain, such as child support, alimony, student loans and taxes. A trustee arranges to collect and sell all of your nonexempt property, with the proceeds divided among the creditors. In short, the courts confiscate and sell most of your assets to pay off creditors and, in return, eliminate most of your debts. Needless to say, Chapter 7 bankruptcy is a drastic step and should be taken only after consultation with a financial advisory and your lawyer.

 Summary of Chapter 7 Bankruptcy:

Who can File: If you make less than the median income in your state, have less than $100 a month of disposable income, or do not have enough disposable income to repay at least 25 percent of your debt over 5 years.

Repayment Requirements: Assets are liquidated to pay off creditors; however, filers generally are able to keep their car and some basic household possessions, with the homestead exemption limited to $125,000 if the property was acquired within the previous 3.3 years.

Long-Term Effect on Your Credit File: Bankruptcy information remains in your credit file for 10 years.

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