Debt Reduction With Chapter 7 Bankruptcy: An Overview of Straight Bankruptcy

Upon filing for a Chapter 7 bankruptcy (sometimes referred to as a Straight Bankruptcy), the court will appoint a trustee to gather and sell all of a person's assets in order to distribute the cash collected among existing creditors. In this way, debt is erased - but most of a person's assets are also lost. Depending upon the state where the person resides, some assets, such as a personal residence, may be exempt from a Chapter 7 bankruptcy sale under very specific circumstances.

The Benefits

While protected under a Chapter 7 bankruptcy, certain creditors are not allowed to contact the person filing, all existing wage garnishments are stopped, and new garnishments cannot be initiated. While only certain debts are discharged (things like back child-support, federal loans, non-profit loans and others are not), a bankruptcy filing can give a person a certain amount of relief from the stress of debt as certain debts are paid off.

The Drawbacks

Of course, one of the main drawbacks of a this type of filing is the loss of personal assets. Second homes, second cars, family heirlooms, valuable collector's items, stocks, bonds, money market accounts, and CDs are among some of the assets sometimes sold to pay off creditors. Also, even after assets have been sold, if a debt is not completely satisfied, a creditor has the right to pursue payment from any cosigners involved in the original application process and who have not filed for their own protection.

Is There a Limit on Assets Sold?

Understand that the court-appointed trustee's job is to gather one's assets and sell them in order to pay down debt. The trustee in question does not have the same emotional or sentimental attachment to these items that the original owner may hold. Therefore, it can be quite stressful to watch items be sold in such a methodical and calculating way, even if the end result is debt relief. Also, all assets owned must be itemized in the original filing or a person faces a risk of being charged with fraud by the federal government if undeclared or hidden assets are later discovered. However, there are state and federal laws, which give exemption status to certain assets. A list of these are outlined during the initial filing phase and a person is allowed to choose which exemption they'd like to take advantage of at that time. Under these exemptions, real estate valued under a certain amount, jewelry, clothing, and other assets may be deemed exempt.

Who Can File This Type of Bankruptcy?

It should also be noted that not everyone is eligible for Chapter 7 protection. For instance, if within the next five years the court determines that a person's income will enable them to repay at least 25% of their unsecured debt, then the person is ineligible for a Chapter 7 filing and is then directed to file for Chapter 13 protection, instead.

Important Considerations

Filing bankruptcy can help a person reestablish credit and become debt free. However, the road to credit and economic recovery is often long and arduous. This type of debt relief should be considered only as a last resort when other options simply will not do. Other alternatives, such as a debt management program, which helps to consolidate debt and negotiate comfortable repayment terms, can also be considered before a final decision is reached.