With the options available to debtors for discharging debts, Chapter 7 bankruptcy is the most popular. The reason is that this form of bankruptcy provides no obligation to repay the debts that the debtor has accumulated. Until recently, it was much easier to have your debts erased through Chapter 7. However, new regulations and guidelines have made it much more difficult to have debts discharged without a plan for repayment.
Although Chapter 7 bankruptcy provides many people with bankruptcy alternatives and a new beginning concerning their finances, it is not a panacea for their problems. The courts do not just grant a complete discharge for debts without fully investigating the circumstances surrounding the debt. People who file for a discharge are obligated to undergo a "means test," which is a comparison of the person's monthly income to that of the state's median income. Due to the new law, bankruptcy petitions are subject to greater scrutiny than in previous years and they require the signature of a lawyer. Bankruptcy filings in the past year also affect the status of one's petition according to the new guidelines. This helps the courts to decide if the person is even eligible for a complete discharge.
The new bankruptcy code guidelines are designed to discourage abuse of the system. If an investigation finds abuse, the court can cancel the bankruptcy or require the debtor to repay their creditors through other means. Suspected abuse includes multiple bankruptcy filings or trying to get debts discharged immediately after an expensive shopping spree. In the end, the court and its officials make the final decision regarding a Chapter 7 bankruptcy before debtors are granted relief.
Chapter 7 bankruptcy is not the only bankruptcy alternative for a debtor. Other bankruptcy options, such as Chapter 13 bankruptcy, allow the debtor to repay the debts in a 3-5 year repayment plan set up by the bankruptcy courts. The court's trustee assesses the debtor's income and debts and decides on a plan in which the money is taken directly out of the debtor's income for the purposes of paying the creditors. This option is often settled out of court with the creditors and is often used as a means for debtors to save their home from foreclosure.
As with any legal or financial matter, the best thing for a debtor to do before filing for Chapter 7 bankruptcy is to consult with a lawyer. You may be able to avoid bankruptcy or find a bankruptcy alternative. Bankruptcy can have many negative effects on a person's life, so it is vital to completely research the advantages and disadvantages of what it will do for you and your finances. For many people facing the decision, Chapter 7 bankruptcy is the best choice because they have few, if any, repayment options. For others, Chapter 13 is a better choice due to psychological and moral obligations to repay their debts. Whatever the reasoning behind the decision, behavior change is often the most important thing to prevent the predicament from happening again.
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