Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a type of bankruptcy that clears unsecured debts. It works well for people who only own a little amount of property, have credit card debts, unpaid medical bills, personal loans and when the family income doesn't exceed the state median for the same family size.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, is a type of bankruptcy that can eliminate many kinds of unsecured debts. For anyone who has got behind with bills and doesn’t have money available to be able to make monthly repayments and pay for living expenses, filing for Chapter 7 bankruptcy may be the last resort to help the individual to reset finances. However, it could mean giving up some prized possessions, and it may have a negative impact on the individual’s creditworthiness which could persist well into the future.
How Does Chapter 7 Bankruptcy Work?
When filing for Chapter 7 bankruptcy, the court immediately halts current debts. This means creditors cannot collect payments, garnish wages, foreclose on the applicant’s home, repossess property, evict the person from a property or turn off utilities. The court takes legal possession of property and will appoint a bankruptcy trustee to handle the case.
The trustee is given the job of reviewing the finances and assets and oversees the Chapter 7 bankruptcy claim. The trustee will sell property that the bankruptcy won't let the applicant keep which is called nonexempt property and the proceeds will be used to repay any creditors. The trustee also arranges and runs a meeting between the applicant and creditors which takes place in a courthouse where the applicant is required to answer questions about the filing.
Most of the Chapter 7 bankruptcy cases are called "no asset" cases, which mean all of the person's property is exempt, or there's a valid lien against the property. When the Chapter 7 bankruptcy has been completed, which takes 4 to 6 months, the court will discharge any remaining debts so they no longer need to be paid. Some debts aren't always dischargeable through bankruptcy. This includes the following:
- child support;
- alimony;
- court fees;
- some tax debts;
- most student loans.
Who Qualifies For Chapter 7 Bankruptcy?
There are several requirements that need to be met to qualify to file for Chapter 7 bankruptcy. These are:
- the completion of a counseling course offered by a credit counseling business within 180 days of the filing taking place;
- the average monthly income in the past six months must not be more than the median income for a household of the same size in the state where the filing for bankruptcy is to take place or pass a test, which determines if the applicant’s disposable income is sufficient to make some of the required payments to any unsecured creditors;
- a Chapter 7 bankruptcy must not have been filed in the last eight years;
- a Chapter 13 bankruptcy must not have been filed in the last six years;
- if a Chapter 7 or 13 bankruptcy has been filed but dismissed, the waiting time for filing again is 181 days;.
What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
There are some important differences between Chapter 7 and Chapter 13 bankruptcy.
A Chapter 7 bankruptcy may wipe out some debts within a few months, but a court-appointed trustee may sell any nonexempt property in order to pay creditors. Only those on a low income may qualify.
A Chapter 13 bankruptcy lets the applicant keep property and organizes a much more affordable repayment plan with creditors. The applicant must have sufficient income to be able to afford the payments and needs to be below the maximum debt limits which is $400,000 for the unsecured debts and $1+million for the secured debts. A court approves the plan for Chapter 13 repayment plan, which normally will last from 3 to 5 years, and the trustee will make the payments to the creditors.
What Dischargeable Debts are Under Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy can wipe out mortgages, car loans, and other secured debts. There are still some debts that the debtor must pay such as recent income tax demands, child and spousal support obligations. Also, debts due to fraud or a criminal act and student loan.
What Exemptions Are There In Chapter 7?
There are exemptions to what has to be sold to get cash to repay creditors. This gives the chance for the debtor to avoid extreme debts and get a new start so they can be involved in contributing to their communities again.
The bankruptcy exemption law safeguards property that the debtor normally needs such as clothing, a working car and furniture. Therefore the property exemptions typically include:
- tools up to certain value which are connected to the debtor's profession or trade;
- some of the equity in a debtor's home;
- public benefits, such as welfare, social security benefits, and unemployment compensation which are held in a bank account;
- a pension;
- necessary furniture and household goods;
- necessary clothing;
- motor vehicles up to a specified value;
- jewelry of a specified value;
- household appliances;
- damages that have been awarded for a personal injury.
When Can I File for Chapter 7 Bankruptcy?
It is common thought that debtors should consider filing a Chapter 7 bankruptcy when they first find they are facing financial difficulties but more thought should be put into this. There are specific signs when filing for a Chapter 7 may be the right thing to do which are:
- lack of ability to get enough sleep;
- insufficient disposable income is left after sticking to a strict budget;
- it is likely to take at least five years to pay off the debt;
- the debt is creating stress in the debtor’s life, such as in relationships, ability to focus sufficiently on work;
- the debtor’s monthly earnings is less than the median level in their state;
- unsecured debts exceed half of the debtor’s yearly income;
How to File for Chapter 7 Bankruptcy
Step 1
Some documents will need to be collected including a credit report, tax returns from the last 2 years; proof of income in the past 6 months; recently issued bank statements; valuations of real estate owned; vehicle registration copy and any documents that show debts, assets and income.
Step 2
The next step is taking a credit counseling course which lasts about an hour and needs to be undertaken six months before filing for bankruptcy in court.
Step 3
Completing the necessary 70 pages of bankruptcy forms come next. Questions will need to be answered about spending, owning and owing. These Chapter 7 bankruptcy forms need to be printed and signed before they can be filed at the local courthouse with the fee of $338 for a Chapter 7 bankruptcy. This can be paid in 4 monthly installments. The counseling course certificate and paycheck stubs must be included with the forms. When taking the forms to the courthouse the clerk will scan them and upload them into the court’s filing system. A case number for the bankruptcy will be provided along with the bankruptcy trustee’s name. A location, date and time of meeting with the appointed trustee and creditors will be given.
Step 4
The trustee should request financial documents, such as bank statements, tax returns and pay stubs. If these are not sent to the trustee a debt discharge may not take place.
Step 5
After the bankruptcy forms have been filed a Debtor Education Course provided by an accredited credit counseling agency will need to be completed online or by telephone which takes about 2 hours and attracts a fee of $10 to $50. The purpose of the course is to learn how to draw up a budget so avoiding debt is more likely.
Step 6
Attend the 341 Meeting
The 341 meeting with the debtor’s appointed trustee and creditors will occur around one month following the filing of the Chapter 7 bankruptcy even though the creditors normally fail to attend. The location date and time will be on notice the court dispatches several days after the filing of the bankruptcy.
Any government-issued ID needs to be brought to the meeting as well as a social security card which proves the debtor’s identity. If these aren’t brought the trustee won’t be able to verify the debtor’s identity so the meeting will not take place. A copy of the bankruptcy forms need to be brought to the meeting and the last sixty days of pay stubs and the most current bank statements.
Speak With a Bankruptcy Lawyer
It is a daunting prospect to admit that filing for Chapter 7 bankruptcy is the only option left, but taking the Free Case Evaluation to speak with an independent attorney will help ease the burden and may bring about a successful outcome to the bankruptcy.
