What Debts Does Chapter 7 Bankruptcy Cover in Alabama?

Chapter 7 bankruptcy is a bit different from Chapter 13 bankruptcy. If you are thinking about filing for Chapter 7, there are essential factors that an experienced attorney can assist you in figuring out which one is best. Those who file for Chapter 7 bankruptcy will receive a fresh start in one lump sum. In other words, it is not like Chapter 13, where you pay over the course of three to five years. 

There are also other stipulations to consider. It only covers certain debts, and you can still lose your property and some valuable possessions in Chapter 7. Chapter 7 only covers unsecured debt and is not recommended in secured debt like mortgages or loans with collateral. In most cases, the person will have to sacrifice valuables to pay off their debt. Some of the unsecured debt covered deals with credit cards, hospital bills, signature loans, and other loans like payday loans. Many people are in debt with loans and credit cards of $25,000 or more. Chapter 7 works best for them if they can fork out a lump sum payment at the beginning of filing. 

How Chapter 7 Works?

There are different laws regarding filing for bankruptcy in Alabama, whether Chapter 7 or 13. Chapter 7 is a bit stricter on their laws than Chapter 13, and it does not cover what Chapter 13 will protect. Those in trouble with the IRS or child support payments will not find this form of filing helpful because Chapter 7 does not cover these. Other debts not covered in Chapter 7 are student loans and alimony. Consumer debts like unsecured loans, credit cards, and medical debts are the main topics for filing for bankruptcy in Chapter 7. In most cases, it can wipe out the debt in as little as three or four months. 

Unlike Chapter 13, Chapter 7 looks at the assets in a home or business. It uses most of the assets to pay off what is owed. This leaves the person filing having to sacrifice what they own to get out of debt. Anything they own is not safe, and they can lose anything paid off, such as a car, home, land, or anything of value more than what is owed. For example, if the person is in debt of $25,000 and has assets worth $100,000, they will lose what is owned in value to pay it off. If the person wishes to keep what is owned, it is best to file Chapter 13.

Another thing to consider is that the process is more difficult because the debtor will have to face the creditors in a meeting to figure out the payoff, and they will have to take a test to see if the payoff formula works for them. The person’s income must be less than the state median for Alabama to qualify. 

Facing the Creditors  

Perhaps this is the hardest of all in filing Chapter 7. Once filing for bankruptcy of any sort, the creditors and debt collectors must stop all phone calls and contact with the debtor. The day comes when the attorney, the client, debt collectors, and a trustee of the courtroom will meet. Any property owned that is not under the exemptions will be collected to pay off the debt owed. 

Once the trustee of the courtroom leaves, they will go to the judge, and the process begins where the debtor must hand over all property requested to pay off the debt. This is why putting up a home, or a most needed vehicle is not the best option unless the debtor has other plans to replace what is lost down the road. If the home has equity and is not under the exemption, the home must be sold to cover the debt. This is when an experienced attorney can guide their client through the process, so they do not lose their home or vehicle. In this sense, filing Chapter 13 is better due to the amount of protection available by law. Facing the creditors is where all the agreements will occur, so if the debtor sees fit to sacrifice a little bit to get out of debt, then Chapter 7 bankruptcy is the best option. 

Nothing is Free 

In the end, those who file Chapter 7 lose something of value. Most people think debt is wiped off like a magic wand. This is not how it works. If a person has filed for Chapter 7 before, it is not recommended to do so again. It is meant as a new start for the debtor as they work their way back up the ladder to better credit. It offers better days, but it is not a free service. The client will also have to pay an upfront cost to the attorney for their time, effort, and services which can be in the thousands for some. Chapter 7 is managed by the laws of Congress. Too many people abused the system, and Congress enacted new laws to stop the abuse to get out of unsecured debts.

In Chapter 13, the attorney will work with the clients as they pay a minimum of $50 and split the payments over the next several months. One lump sum payment will cover everything at the beginning of the meeting with the attorney in Chapter 7. That is if the attorney takes the case. This amount is not disbursed throughout the years of payments like those in Chapter 13. The cost depends on how much damage is in debt and how much it will take to restore the person’s credit and life back to order. The more assets, the more debt, whether it is husband and wife jointly or individual, all plays a role in how much the down payment is expected. Every case is different when it comes to bankruptcy. The attorney in charge will know which option is best for the client at the consultation time, and they will go from there.