Chapter 7 bankruptcy is what is known as a “total liquidation” bankruptcy. This is the most common type of bankruptcy, and what people generally think about when they hear the word bankruptcy. Chapter 7 bankruptcy wipes out most (sometimes all) debt in exchange for a bankruptcy trustee liquidating all your non-exempt assets. However, in most cases the individuals own very little non-exempt assets and end up keeping most, if not all, of their property.
Who is Eligible for Chapter 7 Bankruptcy?
Individual persons, married couples, partnerships, corporate entities, and other business organizations may all file for Chapter 7 bankruptcy. A “means test” is required to determine whether you qualify for Chapter 7 Bankruptcy.
The Means Test: The Means Test calculates an individual’s monthly income to determine whether they have available income each month to pay a portion of their debts. The Means Test is necessary if a person’s monthly income is above the state median family income where they live (go here to see the Department of Justice’s MFI amounts).
The Means Test is a calculation of your income and your bills (such as rent, food, medical needs, and utilities) to decide whether the government believes you need to file bankruptcy under Chapter 7 or Chapter 13 of the bankruptcy code.
How Much Does Chapter 7 Bankruptcy Cost?
As of June 1, 2014 the cost for filing a Chapter 7 bankruptcy petition is $335. However, given the complicated nature of the bankruptcy process most people choose to hire an attorney, which could cost anywhere from $1000-$4000+ depending on the case details and profile of the law firm.
Credit Counseling Requirement: Before filing Chapter 7 bankruptcy you will be required by law to undergo credit counseling by an approved credit counseling agency. An individual must undergo credit counseling prior to their bankruptcy creditor meeting (called a 341 meeting). The credit counseling agency must be approved by the court and proof or certification must be filed and presented to the court prior to discharge. Although it sounds like a painful process, the credit counseling requirement is commonly fulfilled with a thirty-minute phone call.
The bankruptcy proceedings will also require at least one court appearance. During the court appearance you will be under oath, and asked questions about your non-exempt assets as they relate to your bankruptcy filing.
How Do I File Chapter 7 Bankruptcy?
To start a Chapter 7 bankruptcy, the debtor is required to file a “petition” along with a number of financial statements that compile your bills, assets, and income. The filing process normally takes place online via a Federal Court system called “Pacer.” Once the documents are uploaded and filed through Pacer and the fees are paid, the bankruptcy court initiates the “automatic stay” period. Many different aspects are covered during the automatic stay period. This is when the Trustee, (the court appointed attorney assigned to your case), reviews your petition and decides whether you have assets that need to be sold or liquidated to pay off some of the debts. Most people that file Chapter 7 bankruptcy do not have assets that can be liquidated to pay down some debts, so for the most part, people don’t need to worry about this.
Stop Hearing from Creditors – The Automatic Stay
Once you file for Chapter 7 bankruptcy creditors are required by law to stop contacting you. This includes an immediate end to creditors garnishing your wages, coming after your assets, and trying to seize property like your house or vehicle.
What Happens to Your Property During Chapter 7
Chapter 7 bankruptcy debtors are allowed under the law to retain certain types of property — property determined to be exempt. Cars and even houses are sometimes considered exempt depending on your situation. Sometimes you may have to sign a “reaffirmation agreement” to keep the asset, which is basically an agreement to continue paying for your bill on time. All property determined to be non-exempt must be surrendered to the court appointed bankruptcy trustee, which will then be liquidated (sold) to pay your debtors for a portion of your debt.
Discharge of Debts Through Chapter 7 Bankruptcy
Once the assets (if they exist) are liquidated or the trustee determines you have a finding of no assets at your 341 meeting, you may qualify for your discharge. Once you have been discharged of your debts, collection agencies and creditors may no longer attempt to collect any debt that you owed. However, there are certain types of debts that individuals are normally not allowed to discharge through Chapter 7 bankruptcy, such as:
- Student Loans (in some instances)
- Recent Tax Debt
- Large Purchases Such as Jewelry
- Liens Against Property
- Child Support
One step most people contemplating Chapter 7 bankruptcy fail to complete prior to their attorney consultation is getting a copy of their credit score and reports. When it comes to a Chapter 7 bankruptcy, a bankruptcy attorney will need to review your credit score and reports to evaluate what debts are hurting you and who the holder of the debts currently are (the original holder of the debt or a new collection company). Under federal law, each credit rating agency must give you one free report per year — obtain yours here.
You might be stressed out, confused, or scared to lose everything because of the debt that has been piling up. Chapter 7 bankruptcy was created for those who need to get the weight of debt off their backs. Get started today — contact a bankruptcy attorney for a 100% free consultation.