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The reasons chapter 7 may not be the right choice

In January 2016, 26 people filed for chapter 7 bankruptcy in the U.S. Bankruptcy Court for the District of Columbia. Five others filed for chapter 13. There is a variety of options for people seeking bankruptcy relief, as the court’s data reflects. Though chapter 7 is one of the more popular choices, it is important to know why it may not be the best fit for every consumer.

In order to qualify for a chapter 7 bankruptcy, the U.S. Courts points out that the following must be true: 

  •        The debtor must not have filed and had dismissed a petition for bankruptcy during the preceding 180 days.
  •        The debtor must have received credit counseling from an approved agency during the 180 days prior to filing.
  •        The debtor must pass the means test to demonstrate that his or her monthly income is either equal to or below the state’s median monthly income.

When a consumer does not pass the means test to qualify for chapter 7, he or she may have to explore the option of filing for a chapter 13 bankruptcy.

Income is not the only factor that should be considered. Chapter 7 bankruptcy can discharge someone’s debts, which is one of the reasons it is commonly sought. However, certain debts may not be eligible for discharge, such as alimony, student loans and income taxes. If the goal is to discharge debts and the majority of a consumer’s debts are not eligible, he or she may want to rethink filing.

Lastly, nonexempt property is often seized in a chapter 7 filing in order to pay off creditors. This could leave family heirlooms, cash, second vehicles and second homes up for seizure. A debtor should have a firm understanding of what he or she could stand to lose prior to filing for bankruptcy. Fortunately, working with a professional can help consumers understand their options and what it could mean for their financial futures.

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