If you are struggling with debt such as credit cards, loans, medical bills and other debts, Chapter 7 might be an option for you. Chapter 7 often referred as liquidation bankruptcy where bankruptcy trustee liquidates or convert your assets into cash to pay off creditors.  However, many people do not have any assets and therefore there is no actual liquidation.

Chapter 7 begins in a courtg where individual lives. The debtor requires to files schedule of assets and liabilities with current income and expenses. Chapter 7 moves rather quickly and you may receive discharge in a few months.

Get the benefits of Chapter 7

Basically, the word bankrupt is very loosely used by all. By actual meaning it doesn't mean getting rid of the debts. When a person or organization wants to get freed from all sorts of financial commitment that he/it has, in legal terms we call it seeking 'discharge' or release. Legal helps can enable you to get rid of your existing debts and let you start afresh. Once your appeal for gaining the penniless status is granted, you would no longer have to pay the debts that you have incurred before the date of filing your petition.

What is chapter 7?

Chapter 7 or title 11 of U.S. Bankruptcy Code is a very well known legal tool that can help you out in the process of selling off your assets and paying off people whom you owe money. This code has a number of advantages and thus popularly applied or suggested by attorneys, lawyers and other financial advisors. Before we get into the details of these advantages, let's take a quick look on the legal definition of assets, in case you have a vague idea of it.

Asset: legal definition

What you possess today or what you are going to own in future, either as per anyone's will or by getting returns from investments, is called your asset. Broadly there are four kinds of assets. Current assets include cash and cash equivalents, any short term investment, receivables, inventory and pre-paid expenses. Common stocks, insurance policies, long term securities, investments made on fixed assets that are not in use right now, special funds etc are long term assets.

Fixed assets are all tangible assets like land, constructions, machines, furniture etc anything that are purchased to get continued and long term benefits or to generate profit. Intangible assets include copyright, trademark, goodwill or anything that cannot be sensed physically but posses values that can be transformed into cash. Under chapter 7, there are exemptions on selling off some assets, specially those you are using for your support and maintenance like clothing, crockery and other home appliances. You have to submit all the details of your assets when you are filing the petition.

Why Chapter 7 is beneficial?

Each case of insolvency is unique and so before filing your petition for discharge, you need to take advice from your legal advisors to know which among the three chapters would be ideal for your case. Here we have listed below the pros of this particular code-

-Each law has some pros and cons but the special feature of chapter 7 is that this is the cheapest code

-The proceedings of chapter 7 is less troublesome than chapters 11 & 13

-After you have filed your petition for discharge, your case would get processed promptly

-As soon as your request for exemptions would be granted by the court, you wont have to pay the debts that you have incurred

-A trustee would be appointed by the court. He/she would first of all go through all the details of your assets and identify the assets that fall in the non-exemption category.

-Then he would sell off your non-exempt assets and raise cash that he would distribute among creditors following the rules of the code to fix the priorities of payments.

-The greatest benefit of this law is your creditors are bound to get the amount that the trustee would pay but not more. Here the trustee has the final say about fixing the amount.

-For individuals, chapter 7 is like a boon. You can get the benefits of this code no matter what amount of debts you have and how many creditors are there. If you have no hope to pay off your credits you can apply for this. If you fulfill the eligibility criteria, you can get discharge and start everything anew.

Points to remember

-Chapter 7 identifies some sort of debts that cannot get discharge facilities. This includes alimonies or financial responsibilities of children, due tax payments of last three years, educational loans, or any debt that is generated due to some fraudulent activities.

-An organization or company that has placed its application for chapter 7, should stop its operations immediately after the submission of the file. But at some occasions, the operations are needed to go on. In that case, a trustee is appointed by the court to look after the business.

-After you have filed an insolvency case and got the discharge, you cannot file another one in next eight years but if situation arises you can apply for chapter 13 after four years of the last discharge received. This is to protect the law from people who can misuse this code.

-The trustee can recover all the payments that you have made to any of your relatives or on behalf of them through your credit cards within past 12 months from the date submission of chapter 7 petition. This is the greatest con of this code that people often miss to take note of. After getting the amount from the credit card companies, the trustee distributes the money among creditors.

-Similar norms are there for people who are not your relatives but whom you have paid through credit cards within 90 days prior to the date of filing.

-Cases that have been filed after 15th October, 2005, need to fulfill a particular eligibility criterion, namely means test, if the per annum income of the petitioner is more than the average income of the geographical area he belongs to.

Regulations on credits

There are some regulations of this law on credit card advances and dues made on purchasing of consumer goods within a period of 90 days prior to the date of making an appeal for chapter 7. If the amount of debt occurred due to purchase of products not falling in the bare necessity goods category is more than $550 from a particular creditor, this would not get discharge benefits.

Similarly, if cash advances taken against any credit card amounts more than $825, it won't be included among the dischargeable items. When you are running a tough time and you can sense that very shortly you are going to have a huge financial crunch, stop using your credit cards except for getting bare necessity items like medicines, foods (excluding expensive dinners or lunch) etc. This can cost you high.

Most people have tendencies of using one credit card to pay off debts for others. Also they start transferring balances from one card to another. These issues can in fact prevent you from getting chapter 7 facilities. The investigators from the court can highlight all these issues to prove that you have not taken any measures to recover your financial crisis and instead you have spent high or misused credit system for personal consumption. And if they succeed in this, you have least chances to get the benefits of this code.

Final words

Insolvency is really a sad event that leaves a bad mark. Even if you are a genuine and honest person who has been trapped or cheated by associates or others and become penniless, this history would be included in your credit report for at least ten years. If you would apply for new credit cards or loans after receiving discharge, a past event of penniless situation would be a major issue to bar them to consider your candidature. But you have a plus point also.

Credit card companies are aware of the fact that if you have got discharge, you cannot file another similar case to escape from making payments within a certain period. So in that case, they can get rest assured that you won't be able to cheat them anyway. But most people face a particular difficulty at this period. Whenever they go for loans, they are asked for higher interest rates or they have to pay larger amounts than usual as initial down payments.

Getting long term loan is most difficult after this event. Loan providers might feel that after ten years you can appeal for another discharge and make them doomed. But a financial lawyer can help you out in this situation. He can make the loan through with the help of supportive documents.