There are good reasons not to file a Chapter 7 bankruptcy, even if you are eligible to do so. First, not all debts are eliminated in Chapter 7. Second, you may lose property or a business that you want to keep.

There are two basic rules for a personal Chapter 7 Bankruptcy. Rule 1: bankruptcy eliminates any legal obligation to pay debts that existed when the bankruptcy case was filed. Rule 2: property will be taken and sold to pay the creditors. For most people, Rule 1 is generally true and Rule 2 is generally false. 

Rule No. 1: Elimination of the Debt
Most debts are eliminated in a Chapter 7 bankruptcy. There are three major exceptions to this rule. First, Congress has decided that some types of debts cannot be affected by bankruptcy. These debts are described as "non-dischargeable". Second, you may want to keep some debts such as debts to family members or car loans. The bankruptcy law provides a formal process for you to keep these debts called "reaffirmation" and the debts are "reaffirmed". Third are debts which are secured by your home, your car or other property. While the debts are technically eliminated, you will lose the property if they are not paid. As a practical matter, these debts survive bankruptcy if you want to keep the property.

Non-dischargeable debts are those which have not been "discharged". Your legal obligation to pay the debt, and the creditor's right to force you to pay the debt both remain even after the bankruptcy case is over. The debts which Congress has chosen to make non-dischargeable reflects policy decisions and, in many cases, the efforts of lobbyists. There are more than 20 different categories of non-dischargeable debts. Here is a partial list of those which are most common:

*  Most, but not all taxes
*  Child, spousal and family support debts
*  Non-support debts which are related to a divorce or separation
*  Most, but not all student loans
*  Damages caused by driving, flying or boating under the influence
*  Debts related to false statements (such as loan applications) or fraud
*  Damages caused by intentional injuries
*  Stolen money held in trust

If you want to keep, or reaffirm, certain debts, your request must be reviewed and approved by the Bankruptcy Court. The 2005 changes to the bankruptcy laws may make your lawyer responsible for the payment of any debts which you want to reaffirm. The Courts have not yet had a chance to decide whether this is a real risk to your attorney. Because of the risk, however, the lawyers in our office will NOT help you with the reaffirmation process. Don't worry. If you want to reaffirm a debt, the creditor involved will be only too happy to help guide you through the process.

The last category is secured debts. These are debts such as mortgages, car loans, furniture loans and others which are related to certain specifically identified property. Technically, Chapter 7 bankruptcy does make the debts go away, but Chapter 7 does not eliminate the creditor's right to take the specific property away from you. If you don't continue to pay the mortgage, the lender will foreclose and take the property. If you don't continue to pay the car loan, the lender will repossess the car. The same is true for other secured debts. As a practical matter, if you want to keep the property, you have to continue paying the debt - even though the debt was discharged, or eliminated in the Chapter 7 bankruptcy case.

Part of the bankruptcy law takes away the right to eliminate any debt in some situations. People who do not provide the Bankruptcy Court with full and complete information are not allowed to discharge their debts. People who have not kept reasonable financial records are not allowed to discharge their debts. People who do not cooperate with the Bankruptcy Court or the Bankruptcy Trustee are not allowed to discharge their debts. People who try to hide their property before filing bankruptcy are not allowed to discharge their debts. These rules can be complicated, but good legal advice can help you avoid these problems.

Rule No. 2. Loss of property
People who file bankruptcy generally get to keep three kinds of property:
*  Exempt property - usually determined by State law
*  Fully mortgaged or over-mortgaged property; and
*  Property that has no value or cannot be sold

Even though you may get to keep certain property in Chapter 7 bankruptcy, this property cannot be sold during the Chapter 7 case without special permission. You need an attorney to help you get this permission.

Exempt property is property which a debtor is allowed to keep. In most cases, this is the same property which someone could keep if they were sued in State Court outside of bankruptcy so the exemptions are usually set by State law. Each State has different rules and for States that don't, the bankruptcy law also has its own rules. Some States, like California, have two different sets of exemption laws and the debtor can choose the exemption plan that works best. Getting a lawyer to help you choose the right list of exemptions is important.

Fully mortgaged or over-mortgaged property is property where the value of the property is less than the amount owed against the property. This property is usually not affected by bankruptcy because it cannot be sold to raise money to pay creditors. You can usually keep this property if you continue making the monthly payments but the creditor will take the property back if you stop making the payments.

Property with no or nominal market value includes such things as non-pedigreed pets, costume jewelry, family photos (unless you have a very famous relative) and similar items that cannot be sold to raise money for your creditors.

The Means Test
The Means Test was passed in 2005 because Congress was convinced by the credit industry that too many people who could pay their debt were filing bankruptcy. If your household has less money to pay bills than most households of your size in your area, then you are eligible and you pass the Means Test. Even if your household has more money than others, you may still pass the Means Test if you spend less than certain government standards which have been created by the IRS. Finally, you can still pass the Means Test if you have exceptional circumstances which a Judge decides are appropriate.

Debtors who cannot pass the Means Test may still be eligible to file Chapter 11, Chapter 12 or Chapter 13.

Here Are Some Reasons Not to File Chapter 7 Bankruptcy

1. You want to keep property with equity which is not exempt. In some cases the Chapter 7 trustee will allow you buy this property back.

2. You are behind in making loan payments on property you want to keep and you cannot earn or borrow enough money fast enough to pay the cash value of the property to your creditors. Chapter 13 is much better for dealing with these situations, but in some cases involving car loans which are more than 910 days old and where the amount of the loan is more than the value of the car, you may be able to make special arrangements to keep the car and pay only the car's fair market value.

3. You have significant debts which are not dischargeable. Again, Chapter 11, 12 or 13 are better able to handle these situations.

4. You have filed another recent bankruptcy and are not eligible to receive another Chapter 7 discharge.