Chapter 7 Alternatives

When it becomes impossible to meet ones financial obligations

, a state of bankruptcy is said to exist.

Businesses and individuals are entitled to file for bankruptcy under chapter 7, which has the attraction of removing debt from the debtor at discharge.

Chapter 7 is the most popular, despite the fact that the debtor has virtually all his or her worldly goods sold. However, this is often an attractive option if one is financially paralyzed by debt.

A compulsory means test was brought in in 2005 to check the true position of a debtor's finances. Failure of this test will prevent a debtor filing under chapter 7 and a chapter 13, or repayment plan, will be enforced.

In effect, if your income, after allowable living expenses are deducted (and these expenses and amounts vary state by state), exceeds the median income of a family of the same size in the same state, over the preceding 5 months before the month bankruptcy was filed, further means test calculations are applied to see if any non secured debt can be repaid. If not, then chapter 7 will be allowed.

With that in mind, there are other alternatives to be considered.

Given how tough life can remain after a discharged bankruptcy, one should not only consider alternatives to chapter 7, but whether going bankrupt is actually necessary in the first place.

Before filing any sort of bankruptcy, a debtor should consult with their creditors to see if repayments etc can be renegotiated or delayed, to allow the debtor some "catch up" time.

Seeking a rescheduling of repayments is basically a chapter 13 filing, where the court agrees with creditors a repayment schedule over 3-5 years. However, if you can negotiate this yourself, without formally going bankrupt, so much the better. A debt counselling service can also assist in seeking an adjustment to repayment terms.

Chapter 11 is suited for businesses. If a case under chapter 7 has been dismissed, then that means that the court feels that the company has sufficient income to repay at least part of it's debts. Chapter 11 allows the company to continue trading, thus generating income, whilst at the same time repaying its creditors by way of an agreed and enforced repayment schedule.

by: Zac Kurtsmier

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