What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is the most common form of bankruptcy in the country. For individual debtors, there are only two bankruptcy choices - Chapter 7 and Chapter 13. About 70 percent of all debtors go with Chapter 7 because it offers a number of advantages.

• Speed. From start to finish, Chapter 7 bankruptcy can take as little as three months before a debtor is discharged. Chapter 13 repayment plans usually last 5 years, placing the debtor under the scrutiny of the Bankruptcy Trustee for 60 months.
• Liquidating most debts. A Chapter 7 bankruptcy will usually liquidate all of a debtor's unsecured debts - things like credit cards or personal loans that aren't secured to collateral like a car or house - completely. In Chapter 13 cases, debtors are required to pay all of their excess income each month into a pool that is split up by their creditors. After 5 years, whatever unsecured debts remain are then discharged in a Chapter 13 case.

The changes in the bankruptcy law that went into effect in 2005 were intended to make it more difficult for debtors to qualify for Chapter 7 bankruptcies. The concern was that people who created their own financial problems were then relying on the ease of obtaining a Chapter 7 bankruptcy discharge to clean up their financial mess. That was initially the case, according to national bankruptcy statistics. But debtors slowly determined that it wasn't always that much more difficult to get a Chapter 7 filing approved, and within four years, the numbers of bankruptcy filings began to more closely mirror the figures before the 2005 bankruptcy law.

There are some issues for debtors involving Chapter 7 that should be carefully studied by debtors to make sure they feel comfortable choosing Chapter 7, however.

• Property in foreclosure. Chapter 7 is not designed to save property where payments have not been made and foreclosure has begun. However, Chapter 13 can help in that exact situation. Because a repayment plan is at the heart of Chapter 13, a debtor there can propose repayments of past-due property payments, while at the same time making current payments. The plan often works because they debtor can take 5 years to pay back the delinquent amounts.
• Non-exempt property. In Chapter 7, the job of the Bankruptcy Trustee is to seize any non-exempt property and divide up those proceeds among creditors. While there are many state and federal exemptions that usually protect the majority of household items and often a home or first car from seizure, debtors with boats, motor homes, second houses or other property subject to seizure may prefer Chapter 13 bankruptcy. The repayment plan in Chapter 13 pays debtors with future money, so property is not seized by the trustee.
• Not paying anything to creditors. Some debtors may feel it is ethically wrong to run up debt with a creditor and then rely on Chapter 7 bankruptcy to wipe away that debt and not pay the creditor a penny. The situation certainly is not illegal, but debtors who have a steady stream of income - with at least some disposal income left after all expenses are paid -  may choose a Chapter 13 repayment plan so they can at least repay some of what they owe to creditors. In practice, few Chapter 13 cases repay all debt owed. In fact, it isn't unusual for a debtor to pay only 10 percent or less upon completion of the 5-year payment plan.