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Does a Ch 7 Bankruptcy Make Economic Sense?
Ever since bankruptcy laws were created the debtor has been given a choice as which chapter they wanted to file. In this regard, it is our experience that most debtors elect to file a Chapter 7. Why? The obvious answer is that a Chapter 7 wipes out almost 100% of their unsecured debts and leaves only secured debt to pay thereby making it easier to keep their home or car.
In this regard, this section directs most of the emphasis towards the debtor selecting a Chapter 7 as a means of relief.
Therefore, If you can't wipe out enough debt, or if you have to sacrifice too much property, Chapter 7 may not be worthwhile. You might then consider a Chapter 13 or other non bankruptcy alternatives.
So, if you are inclined to file for Chapter 7 bankruptcy and to determine if it makes economic sense you need to answer two questions.
- Will bankruptcy wipe out enough of your debts to make it worthwhile?
- Will you have to give up too much property?
To answer the first question, as mentioned above, certain categories of debts cannot be discharged. These are called non-dischargeable debts, and it won't make much economic sense to file if these debts survive the filing of a bankruptcy.
Additionally, some debts may be ruled non-dischargeable only if a creditor objects by filing a separate motion (lawsuit) in bankruptcy court during your open case. Examples include the following:
- Debts incurred on the basis of fraud, such as entering false information on a credit application or charging more than $1,000.00 in cash or goods or services per credit card within 60 days of filing your Petition. (USC § 523(a)(2));
- Debts from a willful and malicious injury to another person's property, including assault, battery, libel and slander ( USC § 523(a)(6));
- Debts from larceny, breach of trust or embezzlement, (USC § 523(a)(4));
- Debts arising out of a marital settlement agreement or divorce decree that aren't otherwise automatically non-chargeable as support or alimony, such as credit-card debts you agree to pay or payments you owe to and axed spouse to even up the division of community property. (USC § 523(a)(15));
- Student loans, unless repayment would cause you undue hardship;
- Income taxes less than three years past due; and
- Court judgments for injuries or death to someone arising from your intoxicated driving.
Even if the bulk of your debts are from potentially non-chargeable debts but only if the creditor files an objection with the court during your bankruptcy, it may still make sense to seek protection and hope the creditors don't file an objection which is very rare.
These are called nondischargeable debts, and it doesn't make much sense to file for Chapter 7 bankruptcy if your primary goal is to get rid of them.
How much property will you have to give up?
To answer the second question whether or not you decide to file for bankruptcy may depend on what property will be taken to pay your creditors (nonexempt property) and what property you will keep (exempt property).
Certain kinds of property are exempt in almost every state, while others are almost never exempt. For a more detailed list of items you can typically keep (exempt property) see exemption chart and codes click here (link to exemption chart see B2
To help you answer the first question..."will bankruptcy wipe out enough debt” it may be helpful for you to make a list of all your debts using the following work sheet:your debts: {print out a few copies in case you make mistakes and you don’t need exact figures...estimate}
Before you begin, you need to determine which of your debts will be discharged in bankruptcy in and which will not so it is imperative that you know the difference between secured and unsecured debts.
Secured debts are defined as those items of real or personal property that you might loose if you don't make your payments. A debt is also secured if a creditor has filed a lien against your property. To completely eliminate a secured debt and bankruptcy, you may have to give up the property that is security for the debt {called collateral} or pay its market value. For example, you bought a car, which is financed with a bank or other types of lending institution, and your present balance is $8,000. In this example, you must either continue to make those payments or surrender the vehicle ... it's your choice. Incidentally, if you surrender a secured item it usually won’t be reported as a repossession on your credit report as this is a process of the bankruptcy.
Unsecured debts are any debt for which you haven't pledged collateral or the creditor has not recorded a lien. The debt is not related to any particular property you possess, and failure to repay the debt will not entitle to the creditor to repossess the property. For example, most bank credit-card charges, medical and legal bills, past due rents, utility bills and store revolving charges are considered unsecured debts and are canceled by filing a Chapter 7 bankruptcy.
What property will you have to give up?
Whether or not you decide to file for bankruptcy may depend on what property will be taken to pay your creditors {non-exempt property} and what property you can keep {exempt property}.
Certain kinds of property are exempt in almost every state, while others are almost never exempt. The following items are typical examples of exempt property:
- Motor vehicles, to a certain value;
- Reasonably necessary clothing;
- Reasonably needed household furnishings and goods;
- Household appliances;
- Jewelry, to a certain value;
- Personal effects;
- Cash value of life insurance, to a certain value;
- Pensions;
- A portion of the equity in your home;
- Tools of your trade or profession, to a certain value;
- A portion of on page but earned wages, and,
- Public benefits {welfare, Social Security, unemployment compensation} in a bank account.
Items you must typically give up {non-exempt property} include:
- Stamp, coin and or other collectibles
- Family heirlooms
- Expensive musical instruments {unless they are tools of your trade}
- A second car or truck
- A second home, and
- Cash, bank accounts, stocks, bonds and other investments.
If it appears that you have a lot of non-exempt property, and you want to keep this non-exempt property you might want consider filing a Chapter 13 bankruptcy or Debt Negotiation.
See When Chapter 13 Bankruptcy Is Better Than Chapter 7 Bankruptcy.
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