Chapter 7 bankruptcy is one of the two most common kinds of bankruptcy, the other being Chapter 13. Under Chapter 7 bankruptcy some or all of your debt can usually be discharged, or forgiven. Chapter 7 is a liquidation bankruptcy, which means you agree to sell, or liquidate, some of your property so you can use its value to repay a portion of your debt. If you’re a business owner, you’ll likely have to sell some property. However, if you’re filing bankruptcy as a consumer it’s common to have all of your debt wiped clean without having to sell anything, since property such as your house and car are usually exempt (meaning nobody can force you to sell them).
Bankruptcy Isn’t Fast or Cheap
Chapter 7 bankruptcy is great for wiping out unsecured debt and helping you get back on your feet after going through a rough financial time. However, it’s not fast, and it’s not cheap. The administration and filing fees for Chapter 7 bankruptcy are around $335, you usually have to make one trip to the court house (for the meeting with the creditors), you have to go through credit counseling, and then you have to go to financial counseling when it’s all over. It takes four to six months, in general, to complete the process and to have your debt discharged. State processes vary, so be sure to consult with a local bankruptcy attorney who’s familiar with the process.
Who’s Allowed to File?
Not everyone can file for Chapter 7 bankruptcy. You’ll have to complete a form called the means test, which will determine whether or not your disposable income, after taking out necessary bills such as your mortgage, would allow you to file for Chapter 13. If you have enough disposable income to facilitate a repayment plan, you won’t be allowed to file for Chapter 7. Additionally, you can’t file if you’ve filed for bankruptcy in the last six to eight years, depending on the type of bankruptcy you filed the first time.
Necessary Bankruptcy Forms
Chapter 7 bankruptcy requires you to fill out quite a few forms. You start with the bankruptcy petition, which is the voluntary bankruptcy form stating you wish to file, and then you’ll have to fill out others that ask you about your property, your income, your expenses, your debt, any property you’ve owned or given away in the last two years, and money you spent during the previous two years. In most states you’re allowed to keep exempt property, which typically includes things like your home equity, clothing, furniture, and social security payments you haven’t yet spent. It also includes things like your car, tools you need to do your wage-earning work, and other items deemed necessary by the courts.
What’s an Automatic Stay?
You can consider the automatic stay the Jedi mind trick of the bankruptcy process. It essentially tells your creditors “This is not the debtor you’re looking for.” Okay, maybe not in so many words, but it does prevent them from coming after you and pursing collections attempts. So while you might have to wait a few months to have your debts discharged, you can still benefit by enjoying a reprieve from all those collections calls. However, keep in mind that the automatic stay only applies to creditors you’ve listed on your forms. Any un-named creditors can still contact you, collect from you, and penalize you as though you’d never filed for bankruptcy. So be sure you’re listing all of your creditors on the forms.
Who Owns Your Finances?
There is a stipulation as to what you can and can’t do with your property after you file for bankruptcy. When you file for Chapter 7 bankruptcy, you’re agreeing to hand over control of your property, debt, and financial affairs to the courts. For this reason, you can’t sell or donate any of the property listed on your papers when you file, and you can’t pay off any of your debt early without the court’s consent. However, you can usually do whatever you want with income and property you obtain and acquire after you file. It’s only your pre-filing debts and property that you can’t touch until the process is over.
Will You Have to Go to Court?
One common concern of people who are considering filing for bankruptcy is that they’ll have to go to court. Typically, you’ll only have to make one trip to the courthouse for something called the creditor’s meeting. This is when you, your attorney, and representatives from your creditors get together and discuss your property, income, and expenses in front of the trustee. It’s usually a painless process that simply confirms what you’ve written in your bankruptcy paperwork.
What Happens to Your Things?
After the creditor’s meeting one of a few things can happen. You could be told that you have to surrender your nonexempt property (property that isn’t protected) to the court. You might also be told that you have to, in lieu of surrendering it, pay the court a cash value equivalent to the item’s worth. Or, if it’s not worth a lot of money and the item would be awkward to transport and deal with, the court might choose to “abandon” the property, meaning even though you’re keeping the property, you’re absolved from any debt related to it. It’s a draw, of sorts. However, most of the time the trustee will determine that individual consumers don’t have any nonexempt property, and you can continue with the process without having to part with any of your possessions.
The Discharge Process
When you receive your discharge, or your notice from the court saying you no longer have any debt and that all has been forgiven, the bankruptcy process is done. Your creditors can’t contact you anymore because your debt to them technically doesn’t exist any longer. You have a clean slate, and though you’ll probably have to take a financial management course (or something similar) you can reset assured that you are off to a new start.
Are All Debts Discharged?
However, there are some debts that are not discharged. These debts will always survive bankruptcy, and you’ll still be obligated to pay them. They include things like child support, tax debts, spousal support, and debt that the court has deemed nondischargeable due to the fact that it was incurred because of malicious or fraudulent acts on your part. (This would include things like restitution payments and money you accrued through criminal or fraudulent means). However, for most other debts, such as medical bills, credit card debt, and other secured debt, you’ll likely receive a total discharge and be on your way to a fresh start.
This guide is meant to help you understand the basics of Chapter 7 bankruptcy and tell you what you can expect as you go through the process. While bankruptcy seems big and scary, it’s really just you telling the court that you’d like a fresh start and you’d like your debt to be pardoned. However, this is not an exhaustive guide. The bankruptcy process can be complicated, and without the help of a bankruptcy attorney you won’t be able to go through the process confident that you’re getting the greatest possible benefit. State laws are different for certain aspects of the process, as well, so always be sure to consult with a bankruptcy lawyer so you can go through the process with ease and comfort.