Chapter 7 offers something every debtor dreams of: a fresh start with no more debt. But there’s more to bankruptcy than meets the eye. Only certain people qualify for one and it may not cancel out all of your debt. If you’re deciding to move ahead with Chapter 7, here are the answers to all of your questions.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy writes off certain types of outstanding debt while allowing individuals to retain exempt assets like a house or car. It gives debtors a fresh start, free from the burden of debt, but you must pass strict criteria to qualify.
Who is eligible to file for Chapter 7?
Only individuals who pass a means test and receive credit counseling 180 days prior to filing are eligible for Chapter 7 bankruptcy. Businesses and individuals who earn too much cannot use Chapter 7 to discharge debts.
How do you pass the means test?
There are two ways that individuals can pass the Chapter 7 means test. The first is by having a monthly income that is lower than their state’s median monthly income.
If your income is too high, you can also qualify by proving that the amount you owe exceeds your disposable income by a certain amount that varies by state.
In both cases, the average monthly income is calculated using figures from the previous six months. As such, it may be beneficial for some individuals to delay filing for Chapter 7 until their six-month average income is a fair reflection of their financial situation.
What is credit counseling?
Individuals must attend a government-approved credit counseling session within a 180-day period before applying. The counselor will discuss alternatives to bankruptcy and determine if steps such as establishing a budget can help you pay off your debts.
What are asset exemptions?
Chapter 7 provides exemptions for certain assets such as your house and your car, providing that they fall below a certain value determined by your state. Anything that is not exempt can be liquefied by your creditors to pay off your outstanding balance.
What is the process of Chapter 7?
After you have completed the necessary credit counseling session, you’ll need to file a petition at your local federal bankruptcy court. This will include filing several forms detailed below and paying the fee to file the case.
You will experiences the benefits of bankruptcy immediately. An automatic stay will stop debt collection agencies from contacting you and wage garnishment will also cease and possibly even reversed. Once the paperwork has been confirmed by the court, they will appoint a bankruptcy trustee to your case and you will need to meet with them to discuss your financial situation. Based on the evidence that you present, they will decide whether or not your case will be accepted.
If the trustee accepts your case, most of your debts will be discharged immediately. But not all of them. Priority debts, such as alimony and child support, as well as debts for federal or state loans, criminal debts, and tax debts cannot be discharged and will need to be paid in full.
This entire process should happen within the space of six months and is usually concluded much faster.
What paperwork is involved in Chapter 7?
You can file for Chapter 7 on your own, but most applicants seek professional advice from a lawyer. The process is complex, procedures must be followed carefully and you will need to submit the following documents:
- Schedules of assets and liabilities
- Your current income and exposure
- A statement of financial affairs
- A schedule of executed contracts and current leases
- A copy of your most recent tax return and any filed during the case
This alone can be difficult for a self-applicant. But you will also be expected to submit the following:
- Your certificate of credit counseling
- A copy of your debt repayment plan if applicable
- Evidence of payment from employers for the previous two months
- A statement of monthly income and anticipated changes
- Records of interest in state or tuition accounts
That’s not all, either. To complete the necessary forms, you’re going to need to compile the following:
- A complete list of creditors and the amounts you owe
- Detailed information about your income
- A list of property you own
- An itemized list of your living expenses
Sound like a lot of work to you? That’s why most people hire a lawyer.
Do I need a lawyer?
You are free to represent yourself but having a lawyer is highly recommended. Not only will they take care of filing all the information listed above, but they will also be liable for mistakes. That means they’ll be on the hook if your case gets tossed due to human error.
Are there any fees involved?
Filing for bankruptcy isn’t free and you’ll have to pay the following fees to file for Chapter 7:
- A case filing fee of $245
- An administrative fee of $75
- A trustee surcharge fee of $15
You will also need to pay your bankruptcy lawyer if you use one. All of these fees can be paid in installments, and court fees can be waived if you live far enough below the poverty line.
Can married couples file jointly?
Yes, married couples can file jointly under Chapter 7, and only one set of forms and one filing fee is required if they do.
Can your Chapter 7 bankruptcy case be dismissed?
Yes, and there are several reasons why your Chapter 7 case may be dismissed. Among the most common are:
- Failing the means test
- Making mistakes on files and applications
- Failing to complete credit counseling
- Failing to pay associated fees
- Not attending court
- Failing to meet your trustee
Your case will either be dismissed with or without prejudice depending on the reason. If it is dismissed without prejudice because of an honest mistake, you can reapply immediately. If it is dismissed with prejudice because you attempted to cheat the system, however, you must wait six months before reapplying, and some debts may be prohibited from getting discharged.
How does Chapter 7 bankruptcy affect my credit history?
Chapter 7 bankruptcy will remain on your credit report for ten years and can cause your credit score to fall by 200 points or more. As a result, you will struggle to get accepted for any form of credit immediately or for several years after. Even when you do get access to credit, your interest rates are likely to be significantly higher than normal, and lines of credit will be smaller.
The good news is that the impact of Chapter 7 bankruptcy on your credit score is diminished with each passing year. And, what’s more, declaring bankruptcy may be much better for your financial future than trying to struggle with the burden of debt.