Today I will discuss with you What Is Chapter 7 Bankruptcy in Simple Terms. Chapter 7 bankruptcy, often known as “straight bankruptcy” or “liquidation bankruptcy,”
Is a form of bankruptcy that can eliminate a wide variety of unsecured debts.
If you are severely behind on your debts and cannot afford monthly payments and living expenses, Chapter 7 bankruptcy may be your only option for resetting your finances.
However, you may be required to relinquish some of your goods, which will have a lasting negative influence on your creditworthiness.
What is Chapter 7 bankruptcy?
Filing for Chapter 7 bankruptcy releases or “discharges” individual debtors from the obligation to pay some delinquent debts while allowing them to retain exempt assets so they can move on with their lives.
There are tight eligibility requirements, and only specific debts can be discharged.
The primary objective of Chapter 7 is to offer persons in dire need a “new start.”
Only individuals and married couples can get a bankruptcy discharge under Chapter 7. Corporations and partnerships can’t.
How does bankruptcy under Chapter 7 work?
When you file for Chapter 7 bankruptcy, the court automatically imposes an automatic stay on your current debts.
This prevents creditors from collecting payments, garnishing wages, repossessing property, evicting you, or turning off your utilities.
The court will seize your property and assign a bankruptcy trustee to your case.
The trustee is responsible for examining your finances and assets and supervising your Chapter 7 bankruptcy.
They will sell the nonexempt property that bankruptcy does not allow you to keep and use the proceeds to repay your creditors.
The trustee will also organize and oversee a meeting between you and your creditors, known as a “creditor meeting,” at which you will appear at a courthouse to answer questions regarding your filing.
The list of property that you are not required to sell or turn over to creditors (exempt property) and its total value varies by state.
Some states permit residents to choose between their state’s exemption list and the federal exemption list.
Most Chapter 7 bankruptcies, on the other hand, are “no asset” cases, which means that all of the debtor’s property is either exempt or subject to a valid lien.
At the conclusion of the process, approximately four to six months after your initial petition, the court will discharge your remaining debts (meaning you are no longer responsible for paying them).
Some debts can’t be wiped out by bankruptcy. These include child support, alimony, court fees, certain tax debts, and most student loans.
What Is the Difference Between Chapters 7 and 13 Bankruptcy?
Chapter 7 and Chapter 13 are the two most common types of consumer bankruptcy.
A Chapter 7 bankruptcy can eliminate certain debts within a few months, but a trustee appointed by the court can sell your nonexempt assets to pay off your creditors.
To qualify, you must also have a low income.
Chapter 13 bankruptcy allows you to keep your belongings and establish a more manageable repayment plan with your creditors.
You must be able to make the payments and not have more debt than is allowed (currently, the limit for unsecured debts is nearly $400,000 and the limit for secured debts is more than $1 million).
After completion of the plan, the remaining unsecured debts are discharged.
Who Can File for Bankruptcy Under Chapter 7?
In order to file for Chapter 7 bankruptcy, you must satisfy the following conditions:
• You are generally required to complete an individual or group credit counseling course through an approved credit counseling agency within 180 days prior to filing.
• Either the average of your monthly income over the past six months must be less than the median income for a household of the same size in your state, or you must pass a means test, which determines whether your disposable income is sufficient to make partial payments to unsecured creditors. Even if you fail the means test, you may still qualify for Chapter 13 bankruptcy.
• You may not have filed for Chapter 7 bankruptcy within the previous eight years.
• You can’t have filed for bankruptcy under Chapter 13 in the past six years.
• If your attempt to file for Chapter 7 or Chapter 13 bankruptcy was dismissed, you must wait at least 181 days before filing again.
• You may be eligible to file, but a court could dismiss your case if it determines you’re trying to defraud your creditors.
What Debts Are Discharged in Chapter 7 Bankruptcy?
In general, a Chapter 7 bankruptcy discharges unsecured debts such as credit card debt, medical bills, and unsecured personal loans.
The following types of unsecured debts are typically not discharged in Chapter 7 bankruptcy:
• Child support
• Alimony
• Student loans
• Some tax debt
• Homeowners association fees
• Court fees and penalties
• Personal injury debts you owe as a result of an accident that occurred while you were under the influence of alcohol
• Child support
Your creditor could also object and prevent the discharge of certain debts.
For instance, a credit card company may contest the debt associated with recent purchases of luxury goods or cash advances, and the court may decide that you must still repay this portion of the credit card’s balance.
Additionally, a Chapter 7 bankruptcy may permit the discharge of secured loan debt.
Secured loans are those backed by collateral, such as a mortgage, or when a creditor has a lien on your property.
Even if the debt is discharged, the creditor may still be able to repossess or foreclose on your property.
What Do You Lose in Chapter 7 Bankruptcy, and What Can You Keep?
If you file for Chapter 7 bankruptcy, you may lose property that is not exempt, property that has a lien on it, and property that you put up as collateral for a loan.
Examples of exempt personal property based on current federal limits include:
• A $25,150 homestead exemption
• As much as $4,000 off a vehicle
• Up to $1,700 in jewelry
• Up to $13,400 in personal property, such as books, clothing, and household items (limit of $625 per item).
• Up to $2,525 in trade books and tools
• Maintenance and child support
Certain insurance advantages
• An additional $1,325 worth of property of your choosing, plus up to $12,575 in unused homestead exemption funds.
If you are married and file a joint tax return, multiply these amounts by two.
Keep in mind that the state exemptions and limits that you can (or must) use when filing for bankruptcy may vary.
In California, the homestead exemption for a single homeowner begins at $75,000, while in other states it is unlimited.
A trustee cannot seize property whose value is less than the exemption amount, so you may be able to keep your home and car.
If your state’s homestead exemption is greater than your $50,000 in equity, the trustee cannot seize your home.
But if your homestead exemption is $25,150, the trustee could seize and sell your home, pay off your mortgage, give you the $25,150 exemption amount, and use the rest of the money to pay back other creditors.
A similar situation could occur with other types of secured debt, such as a car loan.
Your creditors can still foreclose on your home or repossess your vehicle if you are behind on your payments after you have filed for bankruptcy.
If you want to keep items that are securing your debts, you may have to continue making payments (if you are not already delinquent) or pay the full purchase price.
How long does filing for Chapter 7 bankruptcy take?
The entire Chapter 7 process, from initial credit counseling to court discharge of remaining debts, typically takes between four and six months.
Your case may take longer if the trustee requests additional documentation or if they must sell your property to repay creditors.
Alternatively, you may wish to attempt to discharge your student loans through bankruptcy. It is possible, but challenging, and may necessitate a lengthy trial.
How long does a Chapter 7 bankruptcy remain on a credit report?
A Chapter 7 bankruptcy is a significant negative mark that can harm your credit for many years.
The accounts that are part of your bankruptcy may be taken off your credit report sooner than the average of seven years for negative marks.
How Do You File Chapter 7 Bankruptcy?
You can file for Chapter 7 bankruptcy on your own or with the assistance of an attorney.
Free assistance may also be available from legal aid centers and nonprofit credit counseling organizations.
Once you have determined your eligibility, the procedure will be largely identical:
1. Attend counseling: It begins with an individual or group credit counseling course from an approved credit counseling agency.
In general, this must be completed within 180 days of filing, with exceptions in cases of emergency or when there are insufficiently approved agencies offering the service.
2. File your forms: Your property, exemptions, creditors, income, recent transactions, and other financial information will be listed on your bankruptcy forms.
If you have secured debts, you must choose between paying off the debt, continuing to make payments, or surrendering the property to the creditor.
3. Send verification documents to the trustee: Once the court accepts your petition, you must send verification documents to the trustee, who will verify your bankruptcy forms.
Included may be recent bank statements, tax returns, paychecks, and business documents.
4. Creditor meeting: Attend the trustee’s creditor meeting and answer questions about your paperwork and situation.
Typically, the meeting is brief, and your creditors may elect not to attend.
5. Attend budget counseling: You must complete a second course from a counseling agency within 60 days of the creditor meeting.
6. Wait for the discharge notice: The court can discharge your debts once it receives your certificate of completion, which is usually within 60 to 75 days of the creditor meeting.
During this time, you may be required to give the trustee your nonexempt property; however, you cannot sell or give anything to anyone else without the trustee’s consent.
Bottom Line
Filing for bankruptcy can be physically, financially, and emotionally taxing.
You can recover from bankruptcy and rebuild your finances and credit, but it will take time.
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