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Chapter 7 just one way to handle credit debt

Credit card debt is one of the most pervasive financial issues facing the American family today. With consumer debt topping $1 trillion this past year, not to mention the associated $104 billion in interest, debt is clearly a problem for some Kentucky residents. Thankfully, there are a variety of ways for a family struggling with debt to handle it -- from savings and repayment methods, to debt reconstruction, to Chapter 7 bankruptcy in the most challenging cases.

For people with multiple credit cards, the "snowball method" can be a good place to start paying back debts. This method involves paying off cards in order from smallest debt to largest, allowing for quick psychological "wins" that help people continue down that path. Contrarily, the "avalanche method" espouses paying off the card with the highest interest rate first, then using the extra money to pay down the next-highest, and so on.

Filing for Chapter 7

Filing for bankruptcy is one of the most important decisions an individual or family can make when struggling with insurmountable debt. However, for some Kentucky residents, the prospect of a Chapter 7 filing can be daunting considering the sometimes-complicated paperwork involved in the process. The support of an experienced bankruptcy attorney can mean the difference between a difficult and confusing journey and a straightforward track to healthier finances.

Chapter 7 bankruptcy involves the appointing of a trustee by the bankruptcy court to an individual's case. This trustee takes an accounting of all accrued assets and proceeds to liquidate nonexempt assets to pay down creditors. Unsecured debt like credit cards is typically discharged by the court. This differs from a Chapter 13 filing, which is essentially a 3 to 5 year repayment plan approved by the court for an individual or family to pay back debts without being hounded by collections agencies.

How Chapter 7 bankruptcy stands out

Filing for personal bankruptcy in the United States typically allows the average person two distinct options. Chapter 7 bankruptcy and Chapter 13 bankruptcy each have their own unique benefits and drawbacks, depending on the individual case. Kentucky residents considering filing for bankruptcy are encouraged to understand the difference between the two and, if necessary, to seek out support from an experienced attorney in determining the course of action that is best for them. 

A Chapter 7 bankruptcy filing is also known as "liquidation bankruptcy," as it involves the sale (or liquidation) of assets to pay down creditors. This is handled by a bankruptcy trustee appointed by the court. Once the filing is discharged, remaining unsecured debts are typically wiped out. This process takes roughly six months at maximum but requires the individual filing to pass a means test (comparing their income to the average income in their state) and to attend credit counseling. 

Explaining Chapter 7 bankruptcy

There are six major types of bankruptcy, but the most common is liquidation or straight bankruptcy. This is also known as Chapter 7, and some Kentucky residents understand it through negative connotations. However, it is important to understand what a Chapter 7 filing constitutes, and what it means for the future financial health of an individual or family. 

Simply put, a Chapter 7 bankruptcy is considered a liquidation bankruptcy because assets are sold off to pay down creditors. The process involves filing the forms and petition with a bankruptcy court local to the individual or family, and the assignation of a trustee who sells assets to pay down creditors who have filed claims against that individual or family. Inside of a few months, the process comes to an end, and the individual or family is released or discharged from their prior debts.

When debt collectors sue

If your creditors are suing you, it is a very serious situation indeed. You will need to take immediate action if you wish to stop the proceedings.

Most creditors only file lawsuits when a debt has gotten very delinquent or the debtor has made no attempts whatsoever to make payments. There is another reason they might sue you, and that is if the statute of limitations on the debt is about to run out.

Why Chapter 7 bankruptcy is beneficial

In 2017, fewer than 500,000 Americans filed for bankruptcy. This is concerning to some financial analysts who believe many people, both here in Kentucky and elsewhere in the nation, would benefit greatly from a Chapter 7 bankruptcy filing. Unfortunately, misinformation and fear can cause some to shy away from a valid and valuable financial solution to overwhelming debt. Thankfully, this can be addressed through education.

The most common reason for a bankruptcy filing is medical debt, followed closely by divorce and those fleeing an abusive partner. However, many people still do not even realize Chapter 7 is an option. This is partly as a result of a 2005 change to the U.S. Bankruptcy Code pushed through by Congress, which made it more difficult for individual consumers to file for Chapter 7. The criteria introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act required individuals to pass a means test, as well as rank below the median income for their state.

Chapter 7 vs. Chapter 13 bankruptcy

Any bankruptcy filing is intended to relieve debt issues, be it for an individual, a household or a business. The two prevailing types of consumer bankruptcy are Chapter 7 and Chapter 13, both of which are used by individuals and families here in Kentucky and elsewhere in the nation to handle debt that has become insurmountable. It is important to understand the distinctions between the two in order to determine which route is best for an individual's situation. 

A Chapter 7 bankruptcy, commonly referred to as a liquidation bankruptcy, involves selling nonexempt property to pay down existing debts. A bankruptcy of this type takes three to four months to complete and stays on a consumer's credit score for up to 10 years. Qualifying for a Chapter 7 bankruptcy involves passing a "means test" that determines where an individual's finances rank as compared to the median income in the filer's state. If an individual comes up below that median, the individual typically qualifies for Chapter 7. 

Filing for Chapter 7 bankruptcy

In 2005, Congress changed details in the U.S. Bankruptcy Code, which some financial experts believe was an attempt to bar the way for some consumers to file for bankruptcy. Here in Kentucky and elsewhere in the nation, the value of Chapter 7 bankruptcy cannot be overstated for individuals, families and businesses facing serious debt. However, it is important for anyone thinking of filing to understand the criteria for qualification.

The Bankruptcy Abuse Prevention and Consumer Act, (BAPCPA) requires anyone filing for Chapter 7 bankruptcy to meet criteria, including falling below the median income for an individual's state of residence. That individual must also pass a test referred to as a "means" test, which is meant to determine whether the amount of debt accrued is enough to qualify for bankruptcy. While the wealthy could once file for bankruptcy, the income cap has relegated filing to those trending toward poverty.

Filing for Chapter 7 multiple times

For many people, filing for bankruptcy is seen as a last resort in cases of extreme debt load. However, as some Kentucky residents are keenly aware, financial catastrophe can strike more than once, leading some to file for more than one Chapter 7 bankruptcy in their lifetimes, or to switch a Chapter 7 filing to a different kind of bankruptcy protection. There are a variety of ways these goals can be accomplished.

Technically speaking, there are no restrictions on the number of times an individual can file for bankruptcy. With that said, individuals who have already been discharged must wait eight years before another can be filed. This is true of Chapter 7 cases; in Chapter 13 bankruptcy protection, on the other hand, a new case can be filed as soon as the previous one has been closed.

Bankruptcies can be dismissed as well as discharged

If you are filing for Chapter 7 bankruptcy, your goal is to get your debts discharged. But the path to discharge is not assured, and you will have to do certain things to make sure that your case remains on track and headed for discharge.

But what about the other outcome — a dismissal? Unless you follow the letter of the law and comply with the court and the trustees, you could find yourself in the unfortunate position of having your bankruptcy petition dismissed.

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