A primer on Chapter 7 liquidation bankruptcy

March 06, 2013

Back in 2005, the federal government made a number of important changes to the bankruptcy laws. The changes were encompassed in the Bankruptcy Abuse Prevention and Consumer Protection Act, a landmark piece of legislation that reframed the way in which most people thought about filing for bankruptcy. Many people incorrectly thought that it was impossible to file for Chapter 7 bankruptcy protection after 2005.

Not long after that legislation was passed came the onset of the so-called "Great Recession" that our country is still feeling the effects of today. This extended period of economic uncertainty has resulted in a record number of bankruptcy filings under the new laws even though misconceptions still persist about Chapter 7 bankruptcy relief.

The good news is that it is still possible to file under Chapter 7; it is just a different process than it was in the past.

The means test

Chapter 7 bankruptcy relief is now determined through a qualifying process known as the "means test." Essentially, since Chapter 7 is a more inclusive form of debt relief, only those people who need the most help will be eligible for it. Eligibility is determined by a financial analysis that looks at the:
- Amount and type of debts, whether they are secured (those that are backed by some sort of collateral like a car loan or mortgage), or are unsecured (like medical bills and credit cards that aren't secured by any collateral)
- Number, type and value of non-exempt assets that could be liquidated to pay for debt relief
- Income coming in relative to the amount of debt

If the means test favors the debtor, then a Chapter 7 bankruptcy - sometimes known as a "liquidation bankruptcy" - can proceed.

Several viable options

Just because one qualifies for a Chapter 7 filing, though, it doesn't mean that it is the best fiscal option for he or she to pursue. Chapter 13 is also a valid personal/consumer bankruptcy option, while Chapter 11 is a possibility for most businesses seeking bankruptcy protection.

Of course, there are also non-bankruptcy options that could be a better fit, like:
- Debt consolidation with a reputable debt management organization
- Negotiating debt settlement directly with creditors
- Liquidating some assets to pay down debt without filing for bankruptcy
- Modifying mortgage, vehicle or personal loan payments temporarily to facilitate "catching up" on past-due payments

Regardless of what type of debt repayment issues you are having, there are financial and legal experts out there who can help you. If you are considering a Chapter 7 bankruptcy filing, speak with an experienced bankruptcy law attorney in your area to learn more about your legal rights and options to get a fresh financial start.

Article provided by Law Office of Ronald D. Cummings
Visit us at www.bankruptcylawcenter.org