Is Chapter 7 Bankruptcy the Right Option for You?
Anyone in debt should be aware that there are several alternatives to bankruptcy, particularly if they are contemplating filing for Chapter 7 bankruptcy. In this article, we discuss when to steer clear of Chapter 7.
In a Chapter 7 filing, most assets are liquidated to help pay down debts. Therefore, it sometimes makes sense to exhaust all other bankruptcy alternatives (explained below) before going down that route.
Don't File If: You Made Fraudulent Charges on a Credit Card
When someone files for bankruptcy, creditors can object to removing your debt if you engaged in fraudulent behavior. This includes:
- Providing false information on a credit card application
- Spending money without the intent to repay it
A bankruptcy court will consider the following when evaluating fraud:
- The time between the credit card charges and filing for bankruptcy
- The recent purchase of luxury items over $500
- The recent withdrawal of large cash advances
- Multiple charges made on the same day
- Your employment status
- A sudden change in buying habits
- Your financial condition at the time of the charges (for instance, whether you could pay the minimum monthly payment)
For a creditor to object to a debt's discharge, it is necessary to file a request with the bankruptcy court. If the creditor fails to make this request or the court determines that the debt was not fraudulent, the court may discharge it.
Don't File If: You Received a Recent, Previous Bankruptcy Discharge
You are ineligible for Chapter 7 bankruptcy if you received:
- Chapter 7 bankruptcy discharge within the past eight years
- Chapter 13 bankruptcy discharge within the past six years
Note that there are some situations where it is a good idea to file a subsequent bankruptcy petition. Talk to a bankruptcy lawyer if you feel filing again is your best option.
Don't File If: A Previous (Recent) Bankruptcy Case was Dismissed
You are ineligible for Chapter 7 if:
- The court dismissed a previous Chapter 7 or Chapter 13 case within the last 180 days
- The case was dismissed due to a violation of a court order
- You requested a dismissal after a creditor asked the court to lift an automatic stay
Don't File If: Too Many Debts Will Survive Bankruptcy
Some debts under Chapter 7 survive a bankruptcy discharge. This means you still have personal liability for those debts. If your debt is largely made up of non-dischargeable debts, you will want to seek another option.
The following types of debts outlive Chapter 7 bankruptcy:
- Child support payments
- Alimony (spousal support)
- Recent taxes (less than three years past due)
- Student loans
- Judgments for auto accidents involving drunk driving
- Trust fund taxes
- Criminal fines or restitution
- Debts incurred for paying back taxes
The following debts may survive Chapter 7 bankruptcy if a creditor challenges the discharge:
- Debt from willful and malicious injury to a person or a person's property
- Debt from a breach of a fiduciary duty
- Debt from embezzlement
- Debt incurred to purchase luxury items
- Debt incurred from fraud
Don't File If: You Might Lose Valuable Property
It is important to know how much property you can keep in a Chapter 7 bankruptcy. Under Chapter 7, the bankruptcy trustee will sell your non-exempt property to pay creditors.
If you will lose property that you would like to keep, filing for Chapter 13 or using another debt relief alternative may be more appropriate.
In most states, you may keep exempt property, such as:
- A certain amount of equity in a home or motor vehicle
- Necessary and inexpensive clothing
- Jewelry valued at less than a certain amount
- Life insurance up to a specific value
- Tools for a trade or profession
- Public benefits, such as welfare, unemployment benefits, and Social Security benefits
- Household appliances
- 401(k)s and other retirement accounts
In most states, a trustee may take the following non-exempt property:
- Expensive musical equipment
- Stamp collections
- Family heirlooms
- Bank accounts
- Boats and airplanes
In many cases, you may keep non-exempt property by:
- Paying the value of it
- Exchanging equally valued exempt property for non-exempt property
Sometimes, you can keep non-exempt property if the trustee decides that its value is not enough to justify the trouble of selling it.
Don't File If: You Could Risk Losing Your Home
You may have to give up your home in a Chapter 7 bankruptcy even if your mortgage is current.
In most circumstances, a trustee will choose to sell a home if the available equity exceeds the owner's homestead exemption or the amount of a homeowner's equity that a state protects.
If the trustee sells your home, the proceeds will be used to pay:
- The mortgage lender
- The expenses generated from the sale
- Unsecured creditors
If a trustee is incapable of generating enough money from selling the home, the trustee might not sell it.
Chapter 13 may be a better option for you to keep their home. Instead of repaying creditors with the proceeds from the sale of a home, you can pay creditors through a court-approved repayment plan.
Don't File If: A Cosigner Will Be Responsible for Your Debt
When a debt is a joint obligation, such as a car loan, a Chapter 7 bankruptcy will not eliminate the debt.
Chapter 7 will discharge your personal liability for the debt, but the cosigner remains responsible for paying it. Consequently, the creditor may attempt to collect the debt from the cosigner.
Don't File If: Chapter 13 Is a Better Option for You
Even if you qualify for Chapter 7, paying creditors in a Chapter 13 repayment plan may be a better alternative. This is especially true if most debt is ineligible for discharge or you will lose valuable property.
Chapter 13 allows you to keep property. It requires you to repay unsecured creditors an amount that is at least the value of non-exempt property. While most debts are ineligible for discharge, certain debts, such as debts created from paying non-dischargeable tax debt, are eligible for discharge under Chapter 13.
Don't File If: You Are a Business and You Want to Stay in Operation
Debtors engaged in business (including corporations, partnerships, and sole proprietorships) may prefer to remain in business and avoid liquidation.
Such debtors should consider filing a petition under Chapter 11 of the Bankruptcy Code. Under Chapter 11, you do not avoid bankruptcy but may seek an adjustment of debts.
Such an adjustment would either reduce the debt or extend the time for repayment, if not a more comprehensive reorganization. Sole proprietorships may also be eligible for relief under Chapter 13 of the Bankruptcy Code.
Moreover, the court may dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer (rather than business debts). This happens if the court finds that the granting of relief would be an abuse of Chapter 7.
Don't File If: You Are Already Planning to Repay Debts
Individual debtors who have regular income may seek an adjustment of debts under Chapter 13 of the Bankruptcy Code.
A particular advantage of Chapter 13 is that it provides individual people with an opportunity to save their homes from foreclosure. It allows them to "catch up" past due payments through a payment plan.
Don't File If: You Make Too Much Money
If your current monthly income is more than the state median, the Bankruptcy Code requires the application of a "means test." This test determines whether the Chapter 7 filing is abusive.
Abuse is presumed if your total current monthly income over five years minus your total allowed expenses is more than:
- $10,000, or
- 25% of your nonpriority unsecured debt (as long as that amount is at least $6,000)
You may rebut a "presumption of abuse" only by showing special circumstances that justify additional expenses or current monthly income adjustments.
Unless you overcome the presumption of abuse, the case will generally be converted to Chapter 13 (with your consent) or will be dismissed.
Don't File If: You Make Too Much Money
There are other ways to deal with creditors short of filing for bankruptcy. Be aware that out-of-court agreements with creditors or debt counseling services might provide an alternative to a bankruptcy filing.
Creditors may want to prevent you from going into bankruptcy if they calculate that a bankruptcy filing will reduce the amount of the debt that will be repaid to them. Some creditors may agree to modify the terms of debt accordingly.
There are other steps you can take before contemplating bankruptcy. Your creditors do not have a blank check to undertake abusive and harassing debt collection tactics, for starters. Federal and state laws prohibit collection practices that cross the line. Taking advantage of this can ease pressure and restore some peace of mind.
Learn About Chapter 7 and Other Debt-Relief Options
It's not always possible to avoid bankruptcy, but it makes sense to consider all options for Chapter 7, Chapter 13, or Chapter 11.
This might sound a bit confusing, so why not do it right the first time? Talk to a bankruptcy attorney near you and get your additional questions answered.