When potential clients call me to inquire about filing a chapter 7 bankruptcy petition, I often sense fear and doubt in their voices.  After all, filing for bankruptcy is unfamiliar territory.  And in the minds of many, seeking bankruptcy protection still carries a stigma, despite headlines in the daily press announcing yet another bankruptcy filing by a prominent corporation.  Did you know that our founding fathers, coming from a country where debtors were put in prison, saw fit to include federal bankruptcy protection as a feature of the United States Constitution?[1] 

 The purpose of the protections embodied in the United States Bankruptcy Code[2] is to provide debtors with a “fresh start” on the road to financial recovery, and to provide for the distribution to their creditors of whatever non-exempt assets they may have. (In the majority of chapter 7 cases, most of a debtor’s assets will be exempt and not available for distribution to creditors.)  Generally, a person who resides in or has a domicile, a place of business, or property in the United States, and who has not previously filed a petition for relief during the preceding 180 days or received a discharge within the previous 8 years, is eligible to be a debtor in a chapter 7 case.[3]  A successful chapter 7 case from a debtor’s perspective will result in the court’s issuing a discharge, allowing the debtor to emerge from bankruptcy free and clear of all unsecured pre-petition debts.  The protections available to individuals and businesses under other chapters will be discussed in future articles.

 A debtor may be considered insolvent if her liabilities (debts) are greater than her assets (a condition called “balance sheet insolvency”), or if she is unable to currently pay her debts (referred to as “cash flow insolvency”). There is no requirement in the Bankruptcy Code that a debtor be insolvent, although there is a requirement that a petition not be filed fraudulently or in bad faith[4].  Therefore, if you know that your current debts exceed your income and you anticipate that you will not be able to remain current in your payments, you may be a candidate for chapter 7 bankruptcy relief before your financial condition worsens. 

 Ultimately, the decision to seek bankruptcy relief will require a careful review of a client’s financial situation with either an accountant or a qualified bankruptcy attorney, but one thing is certain: delaying action until you are floundering will not make your debts go away and will not improve your financial situation.  Moreover, under the 2005 amendments to the Bankruptcy Code, a debtor filing under chapter 7 must receive financial management counseling through a qualified credit counseling agency, which exercise often may be instructive on how to re-think money management. 

 There are many ways to approach financial difficulties, including debt consolidation and loan modification, all of which should be explored as part of a comprehensive financial review with a qualified bankruptcy attorney.  If chapter 7 is your chosen solution, it should be the path to a financial fresh start – not a trip to purgatory.

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[1] U.S. Const. art I, § 8, cl.4.

[2] 11 U.S.C. §§ 101 et seq.

[3] 11 U.S.C. §§ 109, 727.

[4] 11 U.S.C. § 523(a)(2)(A).