When is Chapter 7 Bankruptcy the Best Option?
When the borrower doesn’t have assets that a trustee can liquidate, a Chapter 7 bankruptcy can be quite useful.
Of course, there’s no doubt that a Chapter 7 bankruptcy is a less expensive way to resolve large amounts of debt, and this is its primary advantage over Chapter 13 bankruptcy or debt settlement. However, Chapter 7 bankruptcy is not always an available option. For instance, if a debtor’s income exceeds federal government guidelines then they will not qualify for a Chapter 7.
Most of us know that too much income or equity in a home makes it difficult to file Chapter 7 bankruptcy. However, there are other qualifiers that are significant, although their importance is not usually readily apparent. Monies in a trust, the ability to liquidate life insurance policies, a personal injury lawsuit, the expectation that the inheritance will soon be paid, and other situations can create problems in a Chapter 7 bankruptcy. This can be quite a disappointment to the filing individual, who had believed or been told that nothing would be taken from him in the Chapter 7 proceeding.
Since most creditors are apprehensive about bankruptcy, often the mention of the “B word” allows for a productive settlement discussion, so that everyone can get “half a loaf” rather than going away empty-handed. As an attorney with 35 years of experience, I think bankruptcy is, as a last resort, an excellent settlement tool. Most creditors understand that it is much more productive to dialogue towards a mutual solution (i.e., debt settlement), rather than force the borrower into bankruptcy.
I find bankruptcy to be a highly effective backstop, which encourages creditors and borrowers to come to the table and work out a mutually satisfactory solution. Most of us just don’t want bankruptcy, whether we are borrowers or lenders.
Since both the creditor and the debtor have something to lose, they are mindful that perhaps it is best to compromise. Unfortunately, in many situations where lawyers are involved, the costs of a settlement are needlessly driven to exorbitant heights, with the lawyers charging far more in legal fees than is necessary without considering the practical alternatives. In our office we attempt to steer away from solutions that are not cost-effective.
My primary goal is to reduce agitation between parties, limit cost, and be able to move on to more productive matters more quickly. Given the bad public reputation of the legal profession, I want to give my clients practical solutions, without too much aggravation. Quite frankly, it is my opinion that it should be the goal of the law to come up with effective solutions that allow all parties involved to move on. Since law is primarily a settlement device, and not “trial by combat”, we want to make sure everyone receives a fair share of a solution’s benefits. Using this approach, I have time and time again learned that the opposing counsel and his client can be used as allies, in assisting me to keep my client’s fees down.
Chapter 7 bankruptcy is an essential tool to help resolve debt issues and restore a client’s peace of mind. For that reason, I’m glad we have a solution in the law that allows people to eliminate debt, and move on to matters that are more productive.