What Chapter 7 Bankruptcy Can Do for Debtors

After the Great Recession of 2008-09, many Americans found themselves in financial crisis – the nationwide effect of mass lay-offs, reduction in income, underemployment and prolonged unemployment. Adding to these were other factors which contributed to the worsening of an individual’s financial situation, such as hospitalization, injuries due to an accident, natural calamity and divorce. All these factors can result to successive failures in paying monthly bills, including mortgage, personal loans, car loan, child support, alimony or spousal support and credit card bills. Due to lapses in payment debts only keep on getting bigger so that settling everything becomes an impossible task.

The pay of millions of wage earners in the U.S. is just enough to cover their basic needs and afford them a simple life style. Loss of job or reduction in pay, even for just a month, can very well be the start of a crushing debt crisis for them. This debt crisis, however, will not be the only source of pressure and stress which they will suffer. After only about three months of continuous lapses in payment of their loans, banks would already consider their loans as bad debts; a major reason for their account to be referred to a collection agency which never shy away from using hounding tactics just to make them pay. This means people calling any time of the day, especially during the late hours, receiving calls even at work and informing other workers about their debt, receiving emails, text messages, and/or letters/notices from law firms. Some collection agencies even go to the extent of requesting the court for garnishment of a debtor’s monetary compensation (until the entire debt is paid) or for a bank levy, which is the freezing of a debtor’s bank account.

Having debts, however, regardless of how big it is, does not need to be a cause of worry to debtors due to the Bankruptcy law, the government’s way of helping people find ways to pay their debts and, so, regain control of their financial situation. This Bankruptcy law or Bankruptcy Code was passed by the U.S. Congress in 1978; it replaces the Nelson Act or the Bankruptcy Act of 1898. There are various chapters under the Bankruptcy Code, one of these is chapter 7, also called Liquidation bankruptcy.

Chapter 7 bankruptcy, the bankruptcy chapter most commonly applied for, is specifically designed for individuals who have properties, but whose income falls within the limit set by the chapter. Under this chapter, a debtor will need to surrender his or her “non-exempt” properties for liquidation. If the surrendered property is a business firm, he or she will also have to cease operation of such firm. Included in the list of non-exempt properties are a vacation home or a second house, bonds, stocks, cash, and other forms of investment. Properties that may not be surrendered (“exempt” properties) include a house, clothing, necessary household appliances, a vehicle or vehicles but only up to a certain value, personal injury compensation, tools, including expensive musical instruments, that are necessary to the debtor’s trade or profession, and jewelry (up to a certain value).

All properties to be liquidated are to be under the charge of a court-appointed trustee. After the trustee has paid all the debts that need to be paid (these are called “non-dischargeable” debts), such as spousal support, child support, government-imposed penalties, court fees, student loan, debts resulting from wrongful death or personal injury, and taxes that are not more than 3 years old since they first became due, the remaining amount (if there is any) will have to be returned to the debtor. Creditors, on their part, will have to accept whatever legally determined amount they are paid, even if this amount falls short of what is actually owed them. This means that they will have to forgive the debtor of any remaining balance and waive their right to make any more collection or payment or suffer severe penalties under federal law.

As mentioned in a website named Ryan J. Ruehle Attorney at Law, LLC, “Chapter 7 bankruptcy offers the near-total liquidation of all debts that an individual may hold, giving those who pursue this option the ability to start their financial life anew.” Many people, however, find Chapter 7 quite complex due to all the legal issues it contains. A bankruptcy lawyer, in this situation, may be the best person who can help debtors understand all these legal issues, and analyze if this is the specific bankruptcy chapter which will best address their financial crisis.

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