What Is Chapter 7 Bankruptcy?
Chapter 7 (Liquidation) is a common form of bankruptcy. It is available to people who cannot make regular payments towards their debt. Businesses opting to terminate their enterprises might also file Chapter 7. This bankruptcy offers relief to debtors irrespective of the amount of debt owed or whether a debtor is insolvent or solvent. A Chapter 7 Trustee is allotted to convert the debtor’s assets into cash to distribute among creditors.
In order to take full advantage of these bankruptcy laws and get a fresh start, it is crucial that you do not keep on incurring additional debt. If all or a chunk of the reason you are filing bankruptcy is overdue federal tax debts, you might need to elevate your withholding and/or your estimated tax payments. In this blog, we will uncover some important information about how to file Chapter 7 and what it is exactly. So, let us go!
What Is A Chapter 7 Bankruptcy?
Chapter 7 is also known as “Liquidation” or “Straight Bankruptcy.” Here, a list of all your assets and debts is filed with the bankruptcy court. The court will assign a “trustee” to display the interests of your creditors who can sell your assets to pay debts. However, in many Chapter 7 cases, your property will be “exempt” by law. It cannot be sold to satisfy the claims of the creditors. When your bankruptcy case is over “final discharge,” almost all of your debts will be erased.
What Is The “Means Test”?
Everyone who files for bankruptcy under Chapter 7 must take a “means test.” This test is a formula-based screening tool to check if you qualify for Chapter 13 (repayment plan) or Chapter 7 (debt liquidation). You do not have to be poor to file for Chapter 7. If you are someone with a higher income, you can also qualify for it if you have high expenses, such as high mortgage payments.
How Does Filing For Bankruptcy Chapter 7 Affect My Credit?
A Chapter 7 bankruptcy generally stays on a person’s credit report for more than ten years from the date the case was filed. On the other hand, the negative accounts stay on their report for only seven years. If you are considering going for bankruptcy, then your credit must already be in bad shape. Review your credit report for free by signing up at Gifted Financial Services. Here, you can see your credit reports from the three major credit bureaus. A bankruptcy notation on your reports will alert any future creditors that you did not pay your debts on time. Restoring bad credit after this bankruptcy will take a lot of your precious time and effort.
Also Read: How To Improve Your Credit Score
What Can A Chapter 7 Bankruptcy Do?
A Chapter 7 Bankruptcy can:
- Allow you to catch up on missed payments and stop foreclosure on your home
- Put an end to collection harassment
- Stop the seizure of your property or car. In some situations, it also forces the creditor to return the property even after it has been reclaimed.
- Eliminate the legal obligation to pay all or the majority of your debts; it is known as the “discharge” of debts.
- Prevent or restore the termination of your utilities for not paying previous bills.
- Restore your driver’s license if it got suspended due to you not being able to pay court-ordered damages for any driving accident (unless it involved any “Driving under the influence – DUI”)
What Can’t Be Done Through Bankruptcy Chapter 7?
Now that we know what you can achieve with a Chapter 7 bankruptcy, it would be wiser to know what you cannot do with it. So, here is a list:
- Protects you from “hot check” or various other criminal charges. It cannot waive fees, criminal fines, restitution, and penalties
- Discharge past-due child-support, recent IRS debts, most student loans, and property taxes
- Eradicate the obligation of a co-signer on your loan; in many cases
- Discharge debts that arise after you file for bankruptcy
- Eliminate the rights of the creditor to secured property, including home mortgages and car loans. Chapter 7 can discharge the debt but not the creditor’s legal claim or lien. After bankruptcy, your car can be repossessed. Similarly, your house can still be foreclosed if you do not make the payments
Are There Alternatives To Bankruptcy?
There might be alternatives to bankruptcy. For further clarification, we suggest you discuss this matter with your lawyer prior to deciding how to move forward. Doing nothing can also be a suitable option if your case is judgment-proof. If your income and property are by law exempt from claims of the creditor, then you have nothing those creditors can take away from you. With the exception of past due child support, you cannot be put behind bars for not being able to pay a debt. However, if you are not judgment-proof, then you can negotiate a payment agreement with your creditors prior to filing for bankruptcy.
Have An Attorney Guide You Through The Chapter 7 Bankruptcy Process
Deciding all of this can be pretty challenging. Thus, prior to filing any papers, we recommend you seek help from a Chapter 7 bankruptcy attorney who has vast experience in the field. They will advise you on whatever is in your best interest. These attorneys will also walk you through the entire process so you will know what you can expect.
Pros And Cons Of Chapter 7 Bankruptcy
The below-given list of Chapter 7 bankruptcy highlights the advantages and disadvantages. It will help you decide which option is best for you.
Advantages of Chapter 7:
- If you are confused about “how long does a Chapter 7 take,” then it is only going to take three to six months to complete. Once it is done, you will enjoy the relief you desperately require from the majority of your debt.
- State exemptions might permit you to preserve most of your property. You also get to keep any property that you acquire or income that you earn after filing for bankruptcy.
- You might be able to get new lines of credit within one to three years of filing bankruptcy.
- Some lenders specialize in lending and home buying for individuals after bankruptcy.
Disadvantages of Chapter 7:
- A Chapter 7 bankruptcy is going to stay on your reports for more than ten years.
- You will lose your property that is not exempted from sale by the bankruptcy trustee. Moreover, you might also lose some of your luxury possessions.
- You would not be able to use all your credit cards where you owe money.
- Bankruptcy is going to make it almost impossible for you to get a mortgage for a while if you do not already have one.
Who Qualifies For Chapter 7 Bankruptcy?
There are a few requirements that you must meet in order to file for Chapter 7 bankruptcy. Continue reading to find out more about them:
Credit Counseling
Generally, you must complete a group or even an individual credit counseling course from an approved credit counseling agency within 180 days prior to filing.
Income Limits
You must pass the means test or the average of your monthly income in the last six months must be less than the median income for a household of the same size in your state. A bankruptcy means test will determine if your disposable income is enough to make partial payments to creditors. Suppose you do not pass the test, then worry not. You will still be able to file for Chapter 13 bankruptcy.
No Recent Bankruptcies
You cannot have filed a Chapter 13 bankruptcy during the last six years or a Chapter 7 bankruptcy during the last eight years. If you tried to file a Chapter 7 or 13 bankruptcy and your case got dismissed, you will have to wait for at least 181 days prior to trying again.
No Fraud
You might be eligible to file, but a court can dismiss your case if it concludes that you are trying to defraud your creditors. For instance, if you use credit cards or take out a loan while intending to declare bankruptcy to avoid repaying the debt.
The Bottom Line
By reading the information given above, you are now aware of what is Chapter 7 bankruptcy. It allows businesses and individuals to eliminate most unsecured debts by liquidating non-exempt assets, with a trustee appointed by the court overseeing the entire process. Debtors can retain exempt assets, while non-exempt assets are sold to pay off the debt.