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The “Clean Slate” of Chapter 7 Bankruptcy

What is Chapter 7 bankruptcy?

Bankruptcy is a process created by federal law that provides relief for debtors, who can either eliminate their debts or repay their debts. The Bankruptcy Code is divided into “chapters” for the various types of bankruptcies. A Chapter 7 “liquidation” is the process by which individual debtors are rid of many of their debts. A Chapter 13 “reorganization” is the process by which an individual or a business prepares a plan for repayment of creditors. Bankruptcy is also intended to protect creditors’ interests by either dividing a debtor’s assets for repayment or creating a plan of repayment.

How does a Chapter 7 debtor get a “clean slate” to begin a new financial life?

Chapter 7 debtors seek to “wipe the slate clean” and start new financial lives. In fact, one of the goals of the Bankruptcy Code is to give debtors a “fresh start,” without the burden of overwhelming debt. Once a Chapter 7 debtor has received a “discharge” in bankruptcy, he is no longer responsible for most of his debts. Debts that cannot be discharged or eliminated in bankruptcy include student loans, most tax liabilities, and child support.

The Bankruptcy Code permits debtors to keep some assets or property that are necessary to begin with a “clean slate” or to make a “fresh start.” These assets and items are called “exempt property.” A debtor may or may not be permitted to keep his home; this depends on a number of factors, including the equity in the home and the “homestead exemption” laws applicable in the state.

Is the slate truly “clean” or are there lasting effects of bankruptcy?

A debtor’s slate is clean only to the extent that she is no longer liable to creditors for most debts. The slate is not truly “clean” as the fact of the bankruptcy will remain on a Chapter 7 debtor’s credit record for up to 10 years. Given the fact that more than 1 million individuals are filing Chapter 7 bankruptcy petitions each year, the “fresh start” offered by Chapter 7 is seen by many financially strapped debtors as either their best or their only option.

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9.5Russell Van Beustring