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Chapter 7 bankruptcy is a powerful process that is available to indebted people who cannot manage their financial obligations. It is often called a “straight bankruptcy,” because it is relatively simple. As long as you qualify, you would be able to walk away from certain debts and start fresh. Here’s what you need to know about Chapter 7 bankruptcy.
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As a qualified Chapter 7 filer, you can have such debts as credit card balances, personal loans, collection accounts, and medical bills discharged in bankruptcy court. Secured debt can be discharged, but you may have to forfeit the collateral put up to secure the loan. If you don’t want to lose the collateral, you can choose to agree to pay off the debt in a process called “reaffirming” the debt.The debts you would be stuck with include taxes owed to the Internal Revenue Service (IRS) or the state; most government fines, such as traffic and parking tickets; owed child and spousal support; and most student loans. In the event you own property and have assets, you may have to forfeit them to satisfy your creditors. What you are allowed to keep depends on whether or not the value exceeds federal or state exemption rules.
Assuming you can file and decide to proceed, you will complete the paperwork, pay the filing fee, take the required credit and bankruptcy course, attend the creditors meeting, and go to bankruptcy court. If the judge grants the Chapter 7 bankruptcy protection, the debts you included in the bankruptcy will be discharged.
To qualify for a Chapter 7 bankruptcy, you have to pass the means test. If your income is at or below the median for your state, you pass and can file. If it's higher, you will have to complete paperwork listing your income, assets, liabilities, and expenses. You won’t be able to use Chapter 7 bankruptcy protection if it shows that you have enough disposable income to manage your debt payments.
When you absolutely know that you cannot make the payments to your creditors, not just now but in the future, it's time to explore bankruptcy. This is especially true if you are having a very difficult time meeting your essential expenses, such as food, medical care, housing, and children's needs.
Do not start running up the credit cards before you file. Consumer debt that you acquire 70 to 90 days before filing will probably not be dischargeable. The same goes for luxury products and cash advances. Also, avoid using your retirement funds to pay for debt that you plan on discharging, because those funds are usually protected.
Above all, don't try to game the process. Selling or transferring property for less than it's worth sends up a red flag that you are committing fraudulent acts, in which case your bankruptcy can be denied.
There are many types of debts that people can include in a chapter 7 bankruptcy. They cannot be secured by property or assets. Dischargeable debts typically include:
Exempt property is the group of assets that you get to keep. You will not be forced to give it up to your creditors because it falls under exemption guidelines. Federal and state law dictate what is exempt from liquidation, but it typically includes:
On the other hand, nonexempt property usually includes:
Chapter 13 is an alternative bankruptcy proceeding that allows you to keep more assets but takes much longer and reorganizes debt, rather than writing it off. There are many differences between a Chapter 7 and a Chapter 13 bankruptcy.
| Chapter 7 | Chapter 13 |
|---|---|
It stays on your credit report for 10 years. | It stays on your credit report for seven years. |
Discharging debt is the goal. | Reorganizing debt is the goal. |
You can lose assets. | You can’t lose assets. |
You must pass a means test. | You must prove your ability to meet the payments. |
It’s finished in a few months. | It’s finished in three or five years. |
An attorney isn’t necessary. | An attorney is usually necessary. |
The differences between a Chapter 7 and a Chapter 11 bankruptcy, a third alternative process, are also striking. Chapter 11 is used by businesses and by individuals whose income is higher than the level that permits people to use Chapter 13. One non-difference: Chapters 7 and 11 both stay on your credit report for 10 years.
| Chapter 7 | Chapter 11 |
|---|---|
Debt is liquidated. | Debt is reorganized. |
You can lose assets. | You can keep assets. |
It’s usually used by individuals. | It’s usually used by businesses. |
It’s a relatively inexpensive process. | It requires attorneys, so is often an expensive process. |
It only takes a few months. | It can take many years to complete the repayment process. |
You must pass a means test. | No means test is required. |
Chapter 7 bankruptcy can have a severely negative impact on your credit.
After you file for bankruptcy, you can regroup. You may have enough money to meet your necessary expenses, as well as any other debts that you did not discharge. If you fell behind on them, you can get back on track.
You may want to apply for a credit card and start using it responsibly. The best cards will not be within reach soon after you file. However, if you use a card with a low limit in just the right way, you will be adding positive information to your credit report, which will elevate your credit scores. You can keep an eye on your credit scores by going to myFICO.com and ordering them.
Pull your consumer credit reports on a quarterly basis. You can get them for free from AnnualCreditReport.com. Get one each from TransUnion, Experian, and Equifax, so you can monitor your credit history and mitigate problems should they occur.
This is also a great opportunity to start saving money and planning for the future. You will be unable to file for Chapter 7 bankruptcy again for eight years, so if you do acquire debt, you will be stuck with it.
Chapter 7 bankruptcy isn't for everyone. For example, you may have assets you want to keep that you would have to forfeit. Whatever the case, always review your options before filing for chapter 7 bankruptcy. These can include:
Chapter 7 bankruptcy has the power to give people who are overwhelmed with large amounts of consumer debt an enormous sense of relief. If you are able to file and it seems right for your situation, it is worth considering. However, there are serious repercussions that last for many years.
Petitioning for a Chapter 7 bankruptcy currently costs $338 in filing fees. If you hire an attorney, expect to pay considerably more.
If you do not have the means to repay your debts with any other remedies, a Chapter 7 bankruptcy may be right, especially if you do not have any property to lose. If you can repay your debt by reorganizing it so that the monthly payments are lower, a Chapter 13 may be your better bet, particularly when you have property you want to keep.
Yes. You will have to pass a means test that gauges how much income you have. If it is at or under the median income for your area, you can file. If it is above that, you will have to document your financial reasons for filing.
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