1.
Chapter 7 bankruptcy is also referred to as “straight” or liquidation bankruptcy. It is the quickest and indeed the simplest form of bankruptcy. Chapter 7 bankruptcy can only be filed by several classes of individuals, in the society. However, before anyone qualifies to file for this class of bankruptcy, the latter must go through a “means test”. The “means test” involves an examination of one’s expenses and income to establish their comparison to the standard that the IRS has set in their particular areas (Frey & Swinson, 2012). A person who can file for Chapter 7 bankruptcy, for instance, is one who earns an income that is less that the documented median income for a family of a similar size in a particular state. A debtor whose income is high, who can repay some of the debts and whose debt has been discharged previously in bankruptcy does not qualify for bankruptcy. In simple terms, Chapter 7 bankruptcy can be filed by honest individuals who are unable to pay their bills and debts.
2.
People file for bankruptcy for a variety of reasons. The most obvious and common of these reasons is the inability to pay one’s bills due to lack of money. Other people usually incur a lot of credit debt which they ultimately realize that they cannot repay. They, therefore, file for bankruptcy in order to eliminate the obligation to repay the debt. People also file for bankruptcy in order to prevent the repossession of their property, for instance, cars and houses. Creditors who are quick to repossess some of the debtor’s possessions can be forced to return the property if the debtor files for bankruptcy immediately (Frey & Swinson, 2012). The other major reason people file for bankruptcy is because they have recently lost their employment. An employed individual who feels confident about their job can take on high debts and sparingly use utilities such as water and electricity leading to high bills. An unforeseen loss of employment inadvertently brings about huge problems when it comes to repaying the debts and the bills, and one might be forced to file for bankruptcy to protect themselves (Frey & Swinson, 2012). However, people also file for bankruptcy because of negative personal actions. These may include drinking, drug abuse of even gambling addiction. These are all activities that take up a lot of money and before one realizes it, they may find themselves with no money and may have no option but to file for bankruptcy in order to protect their current assets and possibly start rebuilding their lives.
3.
Bankruptcy inadvertently affect the interest rates on loans as well as on credit cards negatively. A person who has filed for bankruptcy essentially leaves a bad mark on his credit score and rating. The credit score affects the loans that one applies for in the future. If a person for instance has previously filed for bankruptcy and then applies for loan, the individual is likely to fetch a very high interest rate as compared to an individual with an exemplary credit score due to absence of bankruptcy filings (Ferrara, 2012). This is also the case when it comes to credit cards. A person whose credit file has cases of bankruptcy has a low credit score and, therefore, the person will receive a higher interest rate on their credit cards. Therefore, the relationship between bankruptcy and loan and credit card interest rates is inverse whereby bankruptcy results in raised interest rates.
References
Ferrara, P. (2012). America's ticking bankruptcy bomb. HarperCollins.
Frey, M., & Swinson, S. (2012). Introduction to Bankruptcy Law. Cengage Learning.
