When A Chapter 7 Bankruptcy Is Not The Right Choice

Chapter 7 bankruptcy is a liquidation proceeding where your unsecured debts are discharged and all but your exempt assets are sold. Bankruptcy helps millions get out from under the grip of creditors but chapter 7 can’t help everyone. With the exception of unsecured debt, chapter 7 will usually not be helpful where there is an excess of income, equity, or secured debts you are thinking of keeping. In addition to these categories, bankruptcy won’t have an effect on certain debts due to concerns of bankruptcy abuse such as certain fines, student loans, and certain judgments. Finally, look at your secured debt versus unsecured and balance the positives and negatives.

It is not ideal to file bankruptcy if you have lots of assets or equity. In the typical Chapter 7 bankruptcy , the majority of the debt will be from credit cards and the debtor will have few assets. With few assets, the general exemption will not be exceeded and there will be no non-exempt assets for the trustee to sell. In bankruptcy, equity is treated like any other asset and if there are assets that are not considered exempt, the bankruptcy trustee has the right to sell them and pay the creditors. Therefore,if you had more nonexempt assets than unsecured debt you would probably be better off not filing. Or, if you have assets that you are determined to keep which exceeds the exemption amount, you are essentially allowing the bankruptcy trustee to sell your assets. You could end up giving the trustee your family heirlooms, cars, houses, stocks and bonds. This also extends to chapter 13 bankruptcies because to have a valid chapter 13 plan the amount paid to unsecured creditors must equal the amount that the same bankruptcy in chapter 7 would yield.

If you have substantial excess income, you may not be eligible for chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) changed bankruptcy law to prevent abuse. This added requirements like the means test which won’t allow you to file for chapter 7 if your median income is above the median income for your area for the particular family size. With too much excess income you will not be able to qualify for a chapter 7 and the bankruptcy trustee may decide to convert your bankruptcy into a Chapter 13 .

Chapter 7 is not recommended where the majority of your debts are unsecured but are in special categories of bankruptcy law. Bankruptcy is designed to help those who are unfortunate rather than ill willed. If you have debts cause by drunk driving, larceny, embezzlement, or similar crimes, these can’t be discharged. Student loans and support payment are also not dischargeable as it would encourage abuse of bankruptcy.

Finally if your debts are primarily secured debts, chapter 7 might not be the right option. Since Chapter 7 bankruptcy only discharges unsecured debts the secured debts will survive the bankruptcy. If you also have a substantial amount of unsecured debt and relieving that debt would allow you to pay your secured debt, then chapter 7 may be the right solution. It may also improve your ability to get a loan modification because you will have more funds available when your unsecured debts are discharged. These are only broad areas that you may consider and only a Los Angeles Bankruptcy Lawyer can analyze your situation and help you plan the right course of action.