Filing for Chapter 7 Bankruptcy

The recent downturn of the American economy undoubtedly fueled by the mortgage crisis and weakening dollar, plagues the minds of many Americans and their pocketbooks. Businesses, too, are not immune to the financial woes permeating the nation. In an alarming number of instances, more and more companies and individuals will utilize bankruptcy as a means of alleviating their current debts and allocating a firmer financial standing for the future. In fact, the United States Courts currently has 1.36 million pending bankruptcies cases under all six chapters and experienced 901,927 new filings for bankruptcy in all chapters in the twelve months prior to March 2008. Of these pending and new filings for bankruptcy, Chapter 7 bankruptcies comprise of 62.1% of these. For the record, the United States Courts report the annual increase of bankruptcy filings from March 2007 to March 2008 is a staggering 29.7%, and undoubtedly given economic forecasts, this trend will continue as individuals and business declare bankruptcy in order to address financial problems.

Debate over Filing Chapter 7 Bankruptcy

Typically, after much analysis, both businesses and individuals, known as non-businesses, conclude one or more forms of bankruptcy (ex. Chapter 7 and chapter 11 bankruptcy) are the only means left to address creditors. As the statistics suggest, almost two-thirds of businesses and non-businesses choose to file for Chapter 7 bankruptcy. The attraction these entities find in Chapter 7 vary in case by case basis, however, the relative simplicity of these cases is one reason. Others include ability to protect some assets during this type of bankruptcy proceeding as well as have some debt obligations discharged as well. In any case, 20,633 businesses and 539,382 individuals filed for Chapter 7 bankruptcy under Title 11 of the United States Code in the twelve months prior to March 2008.

Chapter 7 Bankruptcy and the Business

By filing Chapter 7 bankruptcy, a company officially ceases operations, and a bankruptcy trustee is appointed by the federal court right away. The responsibility of the trustee involved liquidating all assets of the now bankrupt company for the sole purpose of satisfying the previous obligations to creditors. Unlike in non-business or individual Chapter 7 bankruptcies, businesses cannot receive any form of discharge from debt obligations. Following the complete liquidation of assets in a fair and equitable manner with federal court and trustee oversight to existing creditors, the courts consider the bankruptcy case complete, and technically, the remaining debts owed, if any, will expire and nullify over time as statutory periods of limitation arise.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and Consequences of Chapter 7 Filings for Businesses

Though the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is more tailored toward the misuse of bankruptcies by individual or non-business debtors, businesses filing Chapter 7 Bankruptcy also face similar constraints. As mentioned above, businesses filing Chapter 7 are not afforded the opportunity to discharge any debts through the bankruptcy proceeding, of which is the opposite and the attraction of Chapter 7 Bankruptcy to individual debtors. Under the new laws, however, the application process for bankruptcy filings has increased in expense as well as difficulty. Another implication for business owners to consider is the length of time one must abide by before filing consecutive bankruptcy claims under the new bankruptcy laws.

Chapter 7 Bankruptcy and the Non-Business

For most individuals facing bankruptcy, about 62.1% according to the United States Courts, their first recourse is to file Chapter 7 Bankruptcy in the federal bankruptcy courts. During Chapter 7 bankruptcies for individuals, finding debt relief, as well as the discharge of existing debts, is possible, but there are some important caveats to note. With the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, these caveats became even more stringent for individuals.

Some obstacles in filing Chapter 7 Bankruptcy include:

  • Raised court costs and fees
  • Stricter "means tests" to indicate if debtors truly are candidates for debt relief
  • Lengthier periods between consecutive bankruptcy filings
  • Fewer debts items possible to discharge through bankruptcy
  • Lessened immediate protections for those filing for bankruptcy
  • Mandatory money management education and debtor counseling

For those individuals facing the utmost desperation in debts, however, following through with a Chapter 7 bankruptcy case is possible, but the assistance of a chapter 7 bankruptcy lawyer is necessary. Proving financial viability for bankruptcy is no longer a simple task, and in addition, chapter 7 attorneys can advise clients on the specific financial items, which prove possible to discharge through bankruptcy and differentiate between those items that are non-dischargeable through bankruptcy.

Items no longer possible to discharge through Chapter 7 bankruptcy include:

  • Financial liens on mortgages and automobile loans
  • Income taxes from the previous three fiscal years
  • Child support obligations
  • The overwhelming majority of student loan debts
  • Alimony or spousal support obligations
  • Criminal fines and restitutions

Along with the high number of non-dischargeable items found in Chapter 7 bankruptcy cases, there is the question of future creditworthiness to consider. For persons filing chapter 7 bankruptcy, this event stays on financial reports for ten years and will undoubtedly influence lending ability and rates well into the future. However, for many persons wallowing in debt, bankruptcy is the only feasible solution to retaining their financial mobility and ability to earn a living. Understandably, rising medical costs, expensive credit card debts, or spikes in property taxes can all cause a person to go into the financial deep end. A bankruptcy lawyer can help clients navigate these confusing and emotional times while keeping clients and their loved one's financial future in the forethought of all their intentions.

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