Introduction: Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the fastest and most common form of consumer bankruptcy. It’s a tool to resolve overwhelming debt under the protection of a federal court. You may have to give up some assets, like an expensive car or jewelry, but the vast majority of filers do not.
This type of bankruptcy forgives most unsecured debts, that is, debts without collateral, like medical bills, credit card debt and personal loans. However, some forms of debt, such as back taxes, court judgments, alimony and child support, and student loans generally aren’t eligible.
Chapter 7 bankruptcy will leave a serious mark on your credit reports for 10 years. During this time you’ll likely find it harder to get credit. Even so, you’ll probably see your credit scores start to recover in the months after you file.
Some debts typically can’t be erased in bankruptcy, including recent taxes, child support and student loans. Bankruptcy still may be an option for you, though, if erasing other kinds of debt would free up enough money to pay the debts that can’t be erased.
Chapter 7 makes sense when:
You don’t have many assets
Your problem debts total more than half your annual income
Your problem debts can be discharged, or forgiven, by Chapter 7. These include debts such as medical bills, credit card debt and personal or payday loans.
It would take five years or more to pay off your debt, even if you took extreme measures
Do you qualify for Chapter 7 bankruptcy?
To qualify for Chapter 7 bankruptcy you:
Must pass the means test, which looks at your income, assets and expenses.
Cannot have had a Chapter 7 discharge in the past eight years or a Chapter 13 bankruptcy within the past six years.
Cannot have filed a bankruptcy petition (Chapter 7 or 13) in the previous 180 days that was dismissed because you failed to appear in court or comply with court orders, or you voluntarily dismissed your own filing because creditors sought court relief to recover property they had a lien on.
1, Credit counseling: You must complete pre-file bankruptcy counseling from a qualified nonprofit credit counseling agency within 180 days before filing.
2. Find an attorney: First find a qualified bankruptcy attorney to help. It’s hard to find money for a lawyer when you need debt relief, but this is not a DIY situation. Missing or improperly completed paperwork can lead to your case being thrown out or not having some debts dismissed.
3. File paperwork: Your attorney will help with filing your petition and other paperwork. But you must gather all relevant documentation of your assets, income and debts. An automatic stay goes into effect at this point, meaning that most creditors cannot sue you, garnish your wages or contact you for payment.
4. Trustee takes over: Once your petition is filed, a court-appointed bankruptcy trustee begins managing the process.
5. Meeting of creditors: The trustee arranges a meeting between you, your lawyer and your creditors. You’ll have to answer questions from the trustee and creditors about your bankruptcy forms and finances.
6. Your eligibility is determined: After reviewing your paperwork, the trustee will confirm whether you’re eligible for Chapter 7.
7. Non-exempt property handled: The trustee determines whether assets that aren’t exempt are worth selling so proceeds can go to creditors. Non-exempt property can be jewelry, or the equity in your house or car if it’s higher than your state’s exemption limit. The majority of individual Chapter 7 cases, however, are “no asset” cases where there are no nonexempt items to liquidate.
8. Secured debts: To resolve your secured debts, the property held as collateral may be ordered returned to the creditor. Or you may be able to redeem the collateral (you pay the creditor what it’s worth now) or reaffirm the debt (arrange to exclude the debt from bankruptcy and continue to pay it back).
9. Education course: Before your case is discharged, you’ll have to take a financial education course from a qualified nonprofit credit counseling agency.
10. Discharge: After filing your petition, your case will be discharged, meaning that eligible debts are forgiven. Shortly thereafter your case will be closed.