What Is Chapter 7 Bankruptcy And How Do I Apply?
Chapter 7 bankruptcy in the United States is a powerful legal tool that allows you to completely erase many debts including credit card debt, payday loans, and medical debt. Experts estimate that more than 39 million Americans have filed for bankruptcy. But what is chapter 7 bankruptcy and how do you apply?
If you are considering Chapter 7 bankruptcy, one question you should ask yourself is: Do I have more debt than my income and assets will ever allow me to repay? Chapter 7 bankruptcy might be an option if the answer is “yes”.
What is Chapter 7?
You will need to fill out forms detailing your income, expenditures, assets, debts, and other information. These forms will be submitted to the bankruptcy court. If you are employed, you will also need to submit your most recent tax returns and payslips.
Your documents and forms will be reviewed by a trustee. They will meet with you for a short meeting, and they will ask you questions about your forms.
You will receive a notice from the court confirming your bankruptcy discharge a few months later. Most people are honest and complete their bankruptcy forms. The court will accept their bankruptcy.
What Debts Can And Cannot Be Erased?
These common debts can be erased by Chapter 7 bankruptcy:
- Credit card debt
- Medical bills
- Car loans
- Payday loans and personal loans
- Judgments of credit card and debt collection agencies
- Utility bills
These debts are called “dischargeable”.
The moment someone files bankruptcy, a rule called the “automatic stay” goes into effect. This temporarily stops anyone from collecting any debts they owe.
These types of debts cannot be erased by Chapter 7 bankruptcy:
- Alimony and child support
- Recent tax debts, and other debts that you owe to the government such as fines
- Most student loans cannot be repaid.
These are also known as non-dischargeable loans.
Secured debts refer to debts that are secured by the property. For example, a mortgage that is backed up by a house or a loan for a car that is backed up by a vehicle. Chapter 7 bankruptcy cannot be used to erase a secured debt if you wish to keep the property you have. You must ensure that you are current on your debt payments before you file. Chapter 7 bankruptcy is an option if you are willing to sell the property. This will allow you to erase any secured debts.
If I File Chapter 7 Bankruptcy, Can I Keep My Property?
95% of Chapter 7 bankruptcy cases allow people to keep their property. Exemption limits allow you to keep up to a dollar amount.
Your state will determine which exemptions you are eligible to use to preserve your property. There are many states that have “wildcard exemptions,” which allow you to keep any property for as long as its value is less than a set amount. The wildcard ceiling for 19 states that allow “federal bankruptcy exemptions” is slightly over $10,000. This means that property worth less than $10,000 can be kept.
The trustee can seize your property if your property’s value exceeds the exemption limit. This will allow you to repay your creditors. Chapter 7 is also known as “liquidation bankruptcy” and it rarely happens.
Nonexempt property is a property that isn’t covered by exemptions. The most common nonexempt property is expensive homes and cars.
Who Qualifies For Chapter 7 Bankruptcy? Do I Need To File?
There are two types of filing: who can file and who should. Most people who earn under the median income for their state, based on their household size, are able to file. According to bankruptcy laws, this is because they have passed the “means test”. The means test considers your average monthly income for the past 6 months.
You will be eligible for Chapter 7 bankruptcy if you do not have a job or make less than the minimum wage. You can file Chapter 13 bankruptcy if you fail the means test but not Chapter 7.
People looking to make a new start usually fall into one of these three categories:
- The time is now to file for Chapter 7 bankruptcy
- People who need to wait a while before filing for Chapter 7 bankruptcy should do so.
- Chapter 7 bankruptcy is not for you.
Do I Need To File Chapter 7 Bankruptcy Now?
Here are some signs you might be a good candidate to file bankruptcy now
- More than $10,000 in dischargeable debt
- Your credit score is already very low (below 600).
- It doesn’t have to be expensive to live on a property
- It is difficult to keep up with the payments and make ends meet each month.
- Are you worried about wage garnishment and being sued for your debt?
- Because you earn less than the state’s median income, you pass the means test
- There is no way to repay your debt in the next five years.
These are the circumstances that may apply to you.
Who Should Not Wait To File?
Waiting a bit can help with certain activities that can make it difficult to file Chapter 7. It’s best not to file until you have paid off all your outstanding charges.
If you paid back or transferred the property to a family member or friend in the last year, then it’s best to wait to file, if you can. These activities must be disclosed in bankruptcy paperwork. Your trustee will inquire about them.
If you are suing someone or intend to sue someone you should wait to file bankruptcy until you have known the outcome. If they are expecting a personal injury settlement, people often defer Chapter 7 bankruptcy.
If you owe money to your landlord and don’t intend to move, you can catch up on any missed rent payments before you file. If you wish to keep your car, the same applies to car loans.
If you are worried about your financial future, you might delay filing. Chapter 7 bankruptcy can only be filed once every 8 years. If you are certain that you will fall into further debt, you should not file.
Chapter 7 Bankruptcy Vs. Chapter 13 Bankruptcy
The major difference between Chapter 7 and Chapter 13 lies in the fact that you can’t immediately eliminate any debts. Based on your ability to repay some debts, you propose a repayment program. The Chapter 13 plan is reviewed by the bankruptcy trustee and creditors. If the plan is acceptable, the court approves the repayment plan. It lasts between three and five years.
For two reasons, people choose to file Chapter 13 rather than Chapter 7. They fail the means test because of their high income and are not eligible for Chapter 7 . They also own a home that they wish to keep but is not included in the Chapter 7 exemptions.
You might be considering filing Chapter 13 if you fail the means test. Here are some reasons why. You might be eligible for Chapter 7 if your household income has dropped in the past 6 months.
How To File Chapter 7 Bankruptcy
- Gather your financial documents. For those who are employed, this typically means just getting your most recent pay stubs. If not, it could also mean getting the last two years’ income tax returns. Also, it’s a good idea to get your most recent bank statements and credit reports.
- Complete the bankruptcy forms. These forms ask about your income, expenses, assets, debts, and other pertinent information. These forms can be completed by either a Bankruptcy lawyer or an individual. These forms are available online at the U.S. Website of the Courts.
- You can take a credit counseling class online. A certificate of completion will be issued to you that you can present to the court.
- Fill out your bankruptcy forms with your bankruptcy court. If your court permits, you can do it by mail or in person. A lawyer can file the forms on your behalf if you have one. This is the end of about 80% of your work. You’ll still need to do some post-filing tasks.
- Send the documents to your trustee. Although they aren’t judges, they will still supervise your case. They will likely ask you to email or mail the same documents that you submitted to the court.
- Learn financial management. You can also take this personal finance course online. The course lasts for 60 minutes and prepares you for the future. The court will require you to sign the certificate of completion.
- Your trustee will invite you to a brief meeting, called a “341 meeting”. It lasts between 5-10 minutes and follows a set of questions. They’ve been conducted by telephone and videoconference during COVID-19.
- Receive your discharge letter. If everything goes according to plan, this will take about 2 to 3 months. Congratulations.
What is the average time it takes to file Chapter 7 bankruptcy?
If you’re organized, most people can file bankruptcy forms in one week. About one to two months after filing, the 341 meetings with your trustee will take place.
If everything goes according to plan, about two to three months will pass before you receive a letter from your trustee confirming that your debt has been officially discharged. This means that Chapter 7 from the beginning to the discharge of your debts takes about 3-5 months.
How much does Chapter 7 bankruptcy cost?
A $338 filing fee is required by the bankruptcy court. If you earn below the Federal Poverty Line, you may qualify for a fee waiver. A fee waiver is usually available to those who are unemployed or on social security. If you request the court, the court will allow you to pay the fee in installments.
The cost of the two online personal finances courses ranges from $10 to $50 depending on which provider you choose. These courses can be waived if you have a low income.
How is life after bankruptcy? What is the average length of Chapter 7 bankruptcy on your credit reports?
Many people who file Chapter 7 bankruptcy feel relieved that their medical and credit card debts, as well as any other dischargeable debt, are gone. People often notice a rise in their credit scores if they have credit scores below 600.
People feel more confident with their finances when they are in bankruptcy than they were before. Two required personal finance courses are part of the reason. Chapter 7 bankruptcy forces you to examine your financial situation.
People who file Chapter 7 usually get more serious about budgeting, saving, and rebuilding their credit, using tools like credit builder loans and secured credit cards.
Chapter 7 stays on your credit report for 10 years, but many people who file see their credit improve and are able to get approved for a mortgage within a few years if they make good financial decisions post-bankruptcy.
Alternatives to Chapter 7
You may have options other than bankruptcy that can help you get the new start you want. It all depends on your financial situation, and what type of debts you have. Let’s look at each option.
Debt Settlement: You can negotiate with your creditors. You can reach out to your creditor if you are behind in payments or about to fall behind. You may be able to work out an affordable payment plan or negotiate a debt settlement for less than the full amount owed. This is especially true for credit card debt. A settlement is usually made in one lump sum.
Repayment Plan: Another option is to enter into a debt management program with an agency. A debt management plan, unlike debt settlement, involves repaying your debt on more manageable terms than what you currently have. Typically only unsecured debts can be included in a debt management plan.
Debt Consolidation: Another option for debt relief is to take out a consolidation loan to consolidate your debts. The new creditor would only need to pay one monthly payment. These loans offer lower interest rates than what you are currently paying.
You can also sell your property to repay creditors. Be careful. You might not get enough money to pay all your debts. You might end up filing for bankruptcy anyway.
The decision to file Chapter 7 depends on how your finances are and what other debt-relief options you have. You should also consider when you file. Taking a credit counseling course or getting an evaluation from a Bankruptcy attorney are great starting places to learn more about your options. Contact us today for more information on chapter 7 bankruptcy.