Chapter 7 bankruptcy
may make you sacrifice property, yet not discharge
all your debt.
If you are inclined
to file for Chapter 7 bankruptcy, take a moment to
decide whether it makes economic sense. You need
to consider three questions:
* Are you judgment
proof -- that is, are creditors legally barred from
taking your property or income even if you don't
file for Chapter 7 bankruptcy?
* Will Chapter 7 bankruptcy discharge enough of your debts to make
it worth your while?
* Will you have to give up property you really want to keep?
Are You Judgment
Proof?
Most unsecured creditors
are required to obtain a court judgment before they
can start collection procedures, such as a wage garnishment
or seizure of personal property. (Collections for
taxes, child support, and student loans are exceptions
to this general rule.)
If your debts are
mainly of the type that require a judgment, the next
question is whether you have any income or property
that your creditors can seize if they go to the trouble
of obtaining a judgment. For instance, if all of
your income comes from Social Security (which can’t
be taken by creditors), and all of your property
is exempt, there is nothing your creditors can take
from you to satisfy their judgment. That makes you "judgment proof."
While you may still
wish to file for Chapter 7 bankruptcy to get a fresh
start, nothing bad will happen to you if you don’t
file, no matter how much you owe.
Will Chapter 7 Bankruptcy
Discharge Enough of Your Debts?
Certain categories
of debts cannot be discharged in Chapter 7 bankruptcy.
It doesn't make much sense to file for Chapter 7
bankruptcy if your primary goal is to eliminate these
nondischargeable debts. The main nondischargeable
debts are:
* back child support
and alimony obligations
* student loans, unless repayment would cause you undue hardship
* income taxes less than three years past due
* recent debts for luxuries (more than $550 to any one creditor
incurred within 90 days before you file for bankruptcy, and cash
advances of more than $825 within 70 days before you file), and
* court judgments for injuries or death to someone arising from
your intoxicated driving.
The bankruptcy judge
may rule some types of debts as nondischargeable
if the creditor objects to a discharge in the bankruptcy
court. These debts include:
* debts incurred
on the basis of fraud, such as lying on a credit
application or writing a bad check
* debts from willful or malicious injury to another or another's
property
* debts from larceny (theft), breach of trust, or embezzlement,
or
* debts arising out of a marital settlement agreement or divorce
decree that aren't otherwise automatically nondischargeable as
support or alimony.
If the bulk of your
indebtedness is from debts that creditors may object
to being discharged, it may still make sense to file
for Chapter 7 bankruptcy and hope your creditors
don't object.
Codebtors will still
be on the hook. If you want to discharge debts for
which you have a codebtor (such as someone who cosigned
a loan for you, or a business partner who is equally
liable for the debt), bankruptcy won't wipe out the
debt. If the debt is of a type that can be discharged
in Chapter 7 bankruptcy, you will no longer be legally
responsible for paying it, but your codebtor will.
How Much Property Will You Have to Give Up?
Whether or not you
decide to file for Chapter 7 bankruptcy may depend
on what property of yours will be taken to pay your
creditors ("nonexempt" property) and what property you get to keep ("exempt" property).
Certain kinds of
property are exempt in almost every state, while
others are almost never exempt. The following are
items you can typically keep (exempt property):
* motor vehicles,
up to a certain value
* reasonably necessary clothing (no mink coats)
* reasonably needed household furnishings and goods (the second
TV may have to go)
* household appliances
* jewelry, up to a certain value
* personal effects
* life insurance (cash or loan value, or the proceeds of life insurance),
up to a certain value
* pensions
* part of the equity in your home
* tools of your trade or profession, up to a certain value
* a portion of unpaid but earned wages, and
* public benefits (welfare, Social Security, unemployment compensation)
accumulated in a bank account.
Items you must typically
give up (nonexempt property) include:
* expensive musical
instruments (unless you're a professional musician)
* stamp, coin, and other collections
* family heirlooms
* cash, bank accounts, stocks, bonds, and other investments
* a second car or truck, and
* a second or vacation home.
Is Chapter 7 Bankruptcy
More Than You Need?
You may be considering
bankruptcy just to stop harassment by your creditors.
However, in most cases, you can stop creditors from
making telephone calls to your home or work by simply
telling them to stop. For more information, seeWhat
to Do If a Bill Collector Crosses the Line.
Deciding Whether to File Chapter 7 Bankruptcy
If you determine that
you are judgment proof, that you'll be stuck with
significant debt following bankruptcy, or that you
may have to give up too much property, Chapter 7
bankruptcy may not make sense for you. For a discussion
of other options, including the possibility of doing
nothing, seeAlternatives to Bankruptcy.
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