Our Bankruptcy Attorney Blog

Although many people think of bankruptcy as an absolute last resort measure to be taken in order to stave off utter destitution, in reality this is not what bankruptcy was designed for and does not represent the best use of the advantages it can offer. Despite the popular impression that bankruptcy is the absolute worst financial move that can be made, in reality there are many times when it is a much better idea than many of the alternatives. When looking at the possible advantages of bankruptcy, first you have to define which type of bankruptcy is being discussed: Chapter 13 (or “Wage Earner Bankruptcy”) or Chapter 7 (or “Straight Bankruptcy”).

Chapter 13 bankruptcy is the option chosen by people that have a lot of assets that would not be exempt under Chapter 7 bankruptcy and are earning a reasonable regular income. Unlike Chapter 7 bankruptcy, no debt is actually discharged or erased, but instead it is all restructured according to a detailed plan.  In effect, it is like court ordered loan modification and as long as the debtor follows the restructuring agreement perfectly, they get to pay off their debt over a three to five year period while preventing their creditors from taking any actions against their property or other measures. Further, Chapter 13 frequently involved the creditors stopping any additional interest or assessing additional fees, so at least in this respect some money is saved. The catch is that the debtor has to follow the restructuring plan to the letter, as any little mistake – like a single late payment – is enough to throw out the entire Chapter 13 repayment plan, leaving the debtor at the mercy of the creditors.

Chapter 7 bankruptcy is more what most people think of when they think of bankruptcy in general. In this process, the debtor loses his or her non-exempt property, which is put up for auction and the proceeds are paid out to the creditors. The remaining debt is discharged, or written off, by the court and no longer remains outstanding against the debtor. Chapter 7 bankruptcy allows most things that are required for living (home, furniture, clothing, etc.) as well as most things required to make a living (vehicle, tools, word-related equipment, etc.) exemption from being liquidated. So Chapter 7 bankruptcy automatically protects your most valuable assets – like your home – from your creditors and may (or may not) result in a significant amount of your outstanding debt being discharged.

Chapter 7 bankruptcy used to be much more beneficial to the debtor, but the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) – a bill that was practically written by professional lending institutions and their lobbyists – changed much of this. Today a debtor has to pass a means test in order to qualify for bankruptcy, has to obtain the approval of a recognized credit counseling agency, can not exempt as much property as used to be the case, and fewer debts can be discharged. Nevertheless, Chapter 7 bankruptcy still offers a range advantages, the most important being the protection of your home and primary vehicle from your creditors.

Tags: bankruptcy

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