Bankruptcy - Alternatives To Chapter 7
Go to: Previous Article Next Article
When it becomes impossible to meet ones financial obligations, a state of bankruptcy is said to exist.
Chapter 7 is available to individuals, sole traders, partnerships and corporations, and is often the favoured chapter to file bankruptcy under, as once the bankruptcy is discharged, the individual or legal entity is no longer liable for any outstanding debt.
Chapter 7 is not without its disadvantages though. Although chapter 7 removes virtually all debt, (there are some exceptions, tax, alimony payments and student loans being examples of debt that cannot be discharged), it also leaves the debtor with nothing, as all personal possessions have to be sold to make payment to the creditors.
A compulsory means test was brought in in 2005 to check the true position of a debtor's finances. Failure of this test will prevent a debtor filing under chapter 7 and a chapter 13, or repayment plan, will be enforced.
In effect, if your income, after allowable living expenses are deducted (and these expenses and amounts vary state by state), exceeds the median income of a family of the same size in the same state, over the preceding 5 months before the month bankruptcy was filed, further means test calculations are applied to see if any non secured debt can be repaid. If not, then chapter 7 will be allowed.
So, what are the alternatives to chapter 7?
The first thing to consider is whether claiming bankruptcy can be avoided in the first place. Bankruptcy has a major negative effect on personal credit ratings and makes any future bank accounts, credit cards or loans very difficult to obtain. Bankruptcy should be an absolute last resort.
Creditors may fear that if one of their customers files for bankruptcy that they will get little or nothing and have to write off the debtor's debts. The debtor should always seek a repayment holiday first, which may have some appeal to the creditors as delayed payment is better than no payment at all.
If you fail the chapter 7 means test, you will automatically be put into chapter 13, which simply rearranges your repayment schedules so all debt is repaid over 3-5 years. However, you could also consider chapter 11 as an alternative.
If you are in business, chapter 11 allows you to keep control of the company and keep trading, with no sale of assets, repaying debts under an enforced repayment plan.
Article Source: Articlelogy.com
- Credit Cards A big selection of Cards in all flavors: Bad Credit Cards, Secured Cards, Prepaid Cards, Canada Cards, Low Interest Cards -
Word Count: 405
Reduce Your Debts Without Bankruptcy. See How Much You Can Save. Free Debt Analysis
