Co-Author: Brittaney McGinnis
Is Chapter 7 bankruptcy an option for you?
If you are going through a divorce, or thinking of getting a divorce, one of your biggest concerns may be the debts you are left to pay after the divorce is finalized. Similarly, if you have recently gone through a divorce, you may be facing financial difficulties due to the transition from a dual income to a single income. In either case, a Chapter 7 bankruptcy liquidation may be an option for you to reduce your unsecured debt obligations.
Not all individuals will qualify to file a Chapter 7 bankruptcy liquidation. In order to be eligible to file a Chapter 7 bankruptcy, you must pass the “means test.” Generally, the means test measures your ability to repay your debts based upon your income, expenses and dependents.
In the event an individual has sufficient disposable income to repay their debts, the individual will not be eligible to file a Chapter 7 liquidation. Instead, a debtor that has sufficient disposable income to repay their debts, or a debtor that seeks to retain certain secured assets, such as a house or a vehicle, will likely have to proceed to reorganize under another bankruptcy chapter wherein the debtor will be required to repay all or a portion of their unsecured debts based upon the debtor’s ability to pay.
Notwithstanding the fact that some debtors will not qualify for a Chapter 7 liquidation based upon their expenses and disposable income, statistically, most debtors will easily qualify to file a Chapter 7 liquidation. When a debtor files a Chapter 7 bankruptcy case, a Chapter 7 bankruptcy trustee is assigned to each Chapter 7 case. The Chapter 7 bankruptcy trustee is tasked with reviewing the debtor’s assets and liabilities. In the event the Chapter 7 bankruptcy trustee determines that the debtor has no realizable assets for the benefit of the bankruptcy estate, the Chapter 7 case will be referred to as a “no-asset” case. A typical no-asset Chapter 7 bankruptcy case is generally concluded in a period of months.
In the event the Chapter 7 bankruptcy trustee locates any realizable assets of the Chapter 7 bankruptcy estate, for example, a gun collection, the Trustee may order turnover of the asset to the Trustee in order that the Trustee may sell the asset and distribute the proceeds to the debtor’s unsecured creditors. Chapter 7 “asset” cases can take substantially more time to conclude.
Assuming the debtor qualifies for a Chapter 7 liquidation and is eligible for a Chapter 7 discharge, typically a discharge will enter a few months after filing the case. A Chapter 7 discharge does not get rid of the debtor’s debts; instead, a Chapter 7 discharge discharges the debtor’s personal obligation to repay certain debts, such as unsecured credit card debt and medical bills. Certain other types of debts are non-dischargeable such as student loan debt, certain tax debt, and domestic support obligations. Therefore, child support payments and maintenance obligations are among the list of obligations that cannot be discharged in Chapter 7 bankruptcy.
Once the debtor files their Chapter 7 case, creditors must cease all collection efforts against the debtor or risk sanctions for a violation of the automatic stay. Similarly, once a debtor is granted a Chapter 7 discharge, creditors are prohibited from contacting the debtor to pursue the discharged debt. If a creditor attempts to pursue a discharged debt from the debtor, the creditor may be sanctioned for violating the discharge injunction. Therefore, bankruptcy may be a prudent choice for a debtor that is being unscrupulously pursued for collection purposes by his or her unsecured creditors.
In summary, if you are contemplating a divorce or have recently gone through a divorce and are straddled with unsecured debt, options may exist to reduce your unsecured debt obligations, thereby allowing you a fresh start towards financial stability for the future.