What is Chapter 7 Bankruptcy? – Quick Bankruptcy Guide
If you’re behind on your bills and have no way of paying your monthly payments, and can’t afford your living expenses, filing Chapter 7 bankruptcy could be a way to save the situation and reset your finances. However, filing bankruptcy is no walk in the park, and there’s a lot you need to understand before you go through with this decision. Here’s how Chapter 7 works and who it is for.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, also known as liquidation or straight bankruptcy, is the quickest, simplest, and most common type of bankruptcy, according to the American Bankruptcy Institute. Its goal is to discharge most of your unsecured debt, including medical bills, personal loans, and credit card debt.
Which Debts Can and Can’t Be Discharged in Chapter 7 Bankruptcy?
While Chapter 7 could ideally dismiss most of the debts you owe, there are still some hard-and-fast debts that can’t be discharged under this chapter.
The list of non-dischargeable debts includes:
● Child support
● Court fees and penalties
● Tax liens
● Personal injury debts due to an accident that occurred while you were intoxicated
The list of debts that can be discharged in a Chapter 7 bankruptcy include:
● Medical bills
● Credit card debt
● Personal loans
● Income tax debt
● Mortgage or automobile loans that you no longer have the means to pay (and you lose possession of)
● HOA fees — if you surrender your home or condo
● Student loans — if you prove undue hardship
● Any other form of unsecured debt
How Does Chapter 7 Bankruptcy Work?
When you file for Chapter 7, the court will place an automatic temporary stay on your current debts. This will stop creditors from repossessing property, collecting payments, foreclosing on your home, garnishing your wages, turning off your utilities, and evicting you. The court will take legal possession of your property and assign a bankruptcy trustee to oversee your case during that process.
The trustee’s job is to review your finances and sell certain property that the bankruptcy chapter won’t let you keep (nonexempt property). The funds from the sale will go to repay your creditors. The trustee will also arrange the so-called creditor meeting between you and your creditors, where you have to answer their questions about your filing.
Although there are certain differences between states, most Chapter 7 bankruptcy cases are “no asset” cases. This means the filer’s property is either exempt or has proof of a valid lien against the property.
The whole case takes about four to six months from your initial filing, on average. At the end of the process, the court will decide which remaining debts to discharge (which means you won’t have to pay them anymore), and those that remain dischargeable through bankruptcy.
It’s crucial to understand that Chapter 7 bankruptcy will leave a big derogatory mark on your credit. It will stay on your credit report for up to 10 years.
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Bankruptcy is a section of the law that allows debtors who are unable (fully or partially) to pay their outstanding debts to get a fresh start and get financial relief. Keep in mind that not all debts qualify to be removed in a bankruptcy case (e.g., student loans). The U.S. Supreme Court explains bankruptcy law as a way to give individuals and entities a new opportunity in life by starting fresh without the pressure and discouragement of preexisting debt. Federal bankruptcy law consists of chapters published in the Bankruptcy Code.
The U.S. Bankruptcy Law covers six different types of bankruptcy, each described in a separate chapter in the Bankruptcy Code. Although they differ in terms and procedures, their common goal is to provide permanent relief from certain outstanding debts. In other words, they help to discharge the debtor’s dischargeable debts. These are the different types of bankruptcy you can file:
Chapter 7: This chapter provides liquidation of the non-exempt assets of the debtor. Certain assets, like a car or a home, may be exempt from bankruptcy, which means the debtor can likely keep them under this chapter. The court appoints a trustee who will oversee the debtor’s non-exempt assets and will handle their sale. The proceeds will go to the creditors. Chapter 7 is open both to individuals and businesses.
Chapter 9: This chapter is intended to help municipalities to reorganize their debts. It is open to towns, cities, villages, municipal utilities, taxing districts, and school districts.
Chapter 11: Intended to help partnerships and corporations, chapter 11 bankruptcy aims to provide a supervised reorganization of a business by allowing the debtor to keep running the business while following a court-ordered payment plan.
Chapter 12: It consists of bankruptcy provisions for family farmers and fishers.
Chapter 13: It is aimed at helping individuals with a steady regular income to create a repayment plan, usually within three to five years, and discharge the remaining dischargeable debt.
Chapter 15: This chapter applies to cross-border bankruptcies that involve foreign parties.
Since bankruptcy can have a lasting negative effect on your credit, you should consider it a last resort option. It is a good idea to hold off on filing if you believe there is a chance to improve your financial situation or that you will have substantial expenses in the near future because there is a limit to how often you can file for bankruptcy.
The moment you file for bankruptcy, this will trigger an automatic stay that will stop wage garnishment, lawsuits, foreclosure, and collection efforts. So, if you want to stop the repossession of your car or the foreclosure of your home, and you have the income to pay off that debt, it may be a good idea to file for Chapter 13, for example. Of course, you should ideally consult with a lawyer before you take any legal action.
Is there a specific amount of debt to qualify for bankruptcy?
Generally speaking, there is no preset minimum amount of debt you need to qualify for bankruptcy. However, certain debt limits apply to Chapter 13, for instance. The maximum amount changes constantly, but it currently is $383,175 for unsecured debt and $1,149,525 for secured debt. If your outstanding debt is relatively low, it’s wise to consider alternative solutions to bankruptcy to ensure that filing for one of the six chapters is still an option for you in the near future. It’s an important consideration because there are limits on how many times a person can discharge debts in bankruptcy.
It is possible, but it depends on the type of debt you have. Most consumer debt can be discharged in a bankruptcy case, but if you forget to include a debt in the process of filing, it will not be discharged. In addition to that, creditors have the right to object to the discharge of any debt.
There are 19 categories of non-dischargeable debts that cannot usually be eliminated (unless a creditor decides not to challenge your effort to discharge them). Some of them include child support, alimony, certain tax debts, criminal restitution, and condo fee debts.
Do I need a lawyer to file for bankruptcy, or can I do it on my own?
It is allowed for individuals to file for bankruptcy without a lawyer. Debtors who decide not to use legal help in the filing process are responsible for understanding local court procedures and what relevant bankruptcy laws apply to them. In general, however, bankruptcy law is very complex and can be confusing. Understanding the process is key, and it is a good idea to consult with a bankruptcy lawyer about your circumstances to ensure you get the best outcome.