Chapter 7 Bankruptcy is the most common type of bankruptcy filed by ordinary consumers. The object of filing Chapter 7 is to obtain a discharge of all your unsecured debts, such as credit cards, and even most judgments. A court "discharge" simply means that you never have to pay any of these debts. Sounds pretty good, right?
Chapter 7 is a very powerful tool, providing a fresh start, free from debt, but it is not for everyone. To qualify for Chapter 7 bankruptcy, the debtor must be able to demonstrate that he or she truly cannot afford to pay any of his or her debts after necessary living expenses. After all necessary living expenses, such as rent or mortgage payments, food, clothing, utilities, car payments, gasoline, insurance, and the like, there cannot be any income left over to pay even a hundred dollars or more toward one's credit cards and other unsecured debts.
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In addition, Chapter 7 bankruptcy also requires that if the debtor has valuable assets that do not fall within an allowed exemption, then the asset must be given up to be liquidated (sold) in order to pay something toward one's creditors. States differ in the exemption amounts or values of assets one may keep in a Chapter 7. California, for example, provides that a married couple under age 65 may keep a home with no more than $75,000 of equity, and a single person under 65 may retain a home with equity no greater than $50,000. Other exemption amounts exist to cover relatively low value vehicles, household furnishings, tools, and other personal assets. The most protected asset in any state is one's qualified retirement accounts. A 401(k) or IRA, for example, are completely exempt or protected in most circumstances.
In a nutshell, a Chapter 7 bankruptcy gives the debtor a second chance free from nearly all unsecured debts, but to get such a benefit, he or she must not earn enough to pay anything toward such debts. And, if the debtor has valuable assets over and above the small amounts he or she is allowed to keep, then those assets will be taken away and sold to pay something toward his or her debts.
If the debtor earns enough to pay something toward his or her unsecured debts, then the debtor will not qualify for a Chapter 7 discharge. Likewise, if the debtor has valuable assets and is not willing to risk them being taken from him, then Chapter 7 is not a good choice for that debtor. In either of these cases, the debtor should consider a Chapter 13 bankruptcy, in which the debtor is expected to pay what he or she can pay after necessary living expenses toward his or her unsecured debts for a period of 3 or 5 years. Under Chapter 13, however, the debtor is able to keep all of his or her assets. Nothing is taken away from a Chapter 13 debtor.
In considering whether to file either Chapter 7 bankruptcy or Chapter 13 bankruptcy, one should always consult with a competent Bankruptcy Attorney.
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