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Advantages and disadvantages of Chapter 7 bankruptcy

Chapter 7 bankruptcy may be the most powerful tool available under the Bankruptcy Code for Florida residents to eliminate debt. However, Chapter 7 comes with some tight eligibility requirements and serious drawbacks.

First, the drawbacks: Sometimes called "liquidation bankruptcy," Chapter 7 requires filers to liquidate some of their assets in order to help pay off debts. Compared to Chapter 13, the other leading form of consumer bankruptcy, Chapter 7 is faster and eliminates more debt.

When businesses file for Chapter 7, it usually means that they are selling off all their assets and wrapping up operations for good. That is not the case with Chapter 7 for consumers. The Bankruptcy Code allows for some personal assets to be exempted. The list of exemptions allows filers to hold onto daily necessities and sentimental items. However, they will likely have to sell their home, if they own it, and they will likely have to do without a second car.

Secondly, the requirements: One of the unusual aspects of filing for Chapter 7 is known as the "means test." This is a way for the court to determine if the person and the debts meet the requirements for Chapter 7. Because Chapter 7 is largely oriented toward businesses, the court wants to see that the person filing for Chapter 7 is doing so mostly because of business debts, such as bad investments. If the debts are more along the lines of consumer debts, such as medical bills and heavy mortgages, the court may find that a different form of bankruptcy protection should apply. There are also many technical requirements for eligibility.

For those who can't keep up with consumer debts but have a regular income, Chapter 13 may be a good option. Chapter 13 does not require selling off assets, but does require filers to go through a court-ordered repayment plan. The process takes three to five years.

There are many options available to people struggling with debt, and not all of them involve Chapter 7. Florida attorneys can help individuals and families understand their options.

Source: United States Courts, "Chapter 7 - Liquidation Under the Bankruptcy Code," accessed on Jan. 8, 2014

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