Individual Chapter 7 : Individuals can file for bankruptcy in a federal court under
Chapter 7 ("straight bankruptcy", or liquidation) or Chapter
13 (a "reorganization", or debt adjustment
case). In a Chapter 7 bankruptcy, the individual is allowed to
keep certain exempt property. Most liens, however survive. The value
of property which can be claimed as exempt varies from state-to-state.
Other assets, if any, are sold (liquidated) by the interim
trustee to repay creditors. Many types of unsecured debt are
cancelled. There are 19 (as of 2005) general classes of debt that are
not discharged in a Chapter 7. Common exceptions to discharge include
child support, most taxes, most student loans, and fines and
restitution imposed by a court for any crimes committed by the debtor.
A disadvantage of filing for personal bankruptcy is that a record
of it stays on the individual's credit report
for 10 years. This may
make credit less available and/or terms less favorable. That must be
balanced against the removal of actual debt from the filer's record by
the bankruptcy, which tends to improve creditworthiness. Future
ability to obtain credit is dependent on multiple factors and
difficult to predict. See our Credit
Center for more information and consumer rights.
Another aspect to consider is whether the debtor can avoid a
challenge by the United States Trustee to his or her Chapter 7 filing
as abusive. One factor in considering whether the U.S. Trustee
can prevail in a challenge to the debtor's Chapter 7 filing is whether
the debtor can otherwise afford to repay some or all of his debts out
of disposable income in the five year time frame provided by Chapter
13. If so, then the U.S. Trustee may succeed in preventing the debtor
from receiving a discharge under Chapter 7, effectively forcing the
debtor into Chapter 13.
It is widely held amongst bankruptcy practitioners that the U.S.
Trustee has become much more aggressive in recent times in pursuing
(what the U.S. Trustee believes to be) abusive Chapter 7
filings. The Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 has clarified this area of
concern by making changes to the U.S. Bankruptcy Code that include,
along with many other reforms, language imposing a means test for
Chapter 7 cases.