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The pros and cons of a Chapter 7 bankruptcy

When residents of eastern Tennessee begin to consider seeking relief from their creditors by filing a petition for bankruptcy, they are faced with choosing between a Chapter 7 petition and a Chapter 13 petition. The choice is made more difficult because all Chapter 7 filers must demonstrate that their income is below the income limit for such petitions. The exact calculation can be complex, but the general rule of thumb is that a person cannot pass the means test if his or her income is more than the median income for a similarly sized household in Tennessee. Assuming that the potential bankruptcy filer can pass the means test, the relative pros and cons of a Chapter 7 bankruptcy are set out below.

A Chapter 7 proceeding can eliminate many debts forever, most notably credit card obligations. Some debts, such as child support and student loan debt, are not subject to discharge, but the order for discharge will provide relief from a great many other types of debt. A Chapter 7 discharge will also bar creditors from engaging in aggressive debt collection actions. One of the significant advantages of Chapter 7 involves a person's residence: if the debtor is not living in a dwelling that is security for a mortgage loan, then a bankruptcy proceeding is not likely to affect the debtor's obligation to make payments on such a loan.

Chapter 7 has a number of significant disadvantages that should be considered carefully. All credit cards will be canceled, and obtaining substitutes can be very difficult. All property that is not exempt from sale by the bankruptcy trustee will be lost. State exemptions will shield a number of assets from sale by the trustee, but non-exempt assets, such as jewelry and works of art, may be lost. A Chapter 7 filing will make obtaining a mortgage loan almost impossible. Certain debts, such as child support and alimony, will not be discharged. A Chapter 7 order for discharge may make obtaining Chapter 7 relief in the near future very difficult.

Anyone thinking about bankruptcy may wish to consult an experienced bankruptcy attorney for advice on the relative pros and cons of Chapter 7 and Chapter 13 and about the future effect of discharges under either chapter.

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