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How to decide if Chapter 7 Bankruptcy is Right for You?

16th March 2011
By Hussein in Bankruptcy Law
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If you have read our article on Chapter 7 bankruptcy means test and figure your income is below the average state median income and you really want to file chapter 7 to erase some of your unsecured debts, here are 3 questions you MUST be able to answer before filing:

i) Are you Judgement proof? This means are creditors legally not allowed to take your property or your income even if you do not file for chapter 7 protection? Typically creditors will not be allowed to take your property or income in unsecured debts such as credit cards, department store cards, legal bills, payday loans, etc.

ii) Will you have to give up property that you cannot afford to lose? If you have a mortgage loan and plan to declare chapter 7 bankruptcy on that, you may NOT be discharged as a mortgage is a secured loan and cannot be discharged through bankruptcy.

iii) Will Chapter 7 filing erase most of your debts that the entire process will be worthwhile? This means will you get a fresh start to your life; will you have learnt the lesson of not accumulating excess credit card debts and use your credit wisely?

i) Are you Judgement Proof?

A judgement proof status is given to a debtor who is financially insolvent and is exempt from the payment of debts owed to creditors either due to insufficient funds or because of bankruptcy protection granted by the state. This is the reason why most creditors are required to obtain a court judgement before they can start their debt collection procedures such as wage garnishments or seizure of personal property. The only types of debts for which a court judgement is not obtainable are student loans, child support & taxes; this is because these debts are not eligible for bankruptcy protection.

If your lender goes through the trouble of obtaining a court judgement, the next question to answer would be do you have any income or personal property to be able to pay back these debts? For example, if you are somebody that relies for money on Social security payments and do not own any property, then it will not be worthwhile for your creditor to obtain a court judgement against you. This inherently makes you ‘judgement proof.’ If you are in such a state, whether you file chapter 7 bankruptcy or not, your creditors cannot come after you simply because you have no other source of income and are on welfare receipts.

ii) Will Chapter 7 Bankruptcy Discharge Most of my Debts?

There are some debts that no matter what cannot be discharged through a chapter 7 bankruptcy. If your main goal is to eliminate the following debts, then it is not advisable to file because you will continue to owe these debts even after filing chapter 7. These debts include:

- Student loans (unless you can prove that paying your student loans would cause you undue hardship)

- Income taxes that have come due within the past three years

- Court judgements from injuries or deaths you caused to someone while under intoxication

- Child support & alimony payments

- Recent luxury debts e.g. more than $550 to any one creditor incurred within 90 days before you file for bankruptcy or cash advances (payday loans) of more than $825 within 70 days before you file bankruptcy.

The bankruptcy trustee or court judge may also rule some debts are non-dischargeable if the creditor objects to a bankruptcy discharge in the court. Some situations where debts may become non-dischargeable include:

- Debts from larceny (theft from creditors) or breach of trust of creditors

- Embezzlement (fraudulent transfer of money or property given to your care but actually owned by someone else)

- Debts from intentional injury to another person or his/her property.

- Debts incurred through fraud e.g. false information on a credit check or writing a fraudulent application

- Debts incurred through a divorce settlement that cannot be discharged through bankruptcy as support or alimony
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