Are you struggling with debt payments and considering filing for bankruptcy to get a fresh start? If so, Chapter 7 bankruptcy is an option to wipe the slate clean and get rid of your debt. However, it’s not right for everyone.
Here’s everything you need to know about Chapter 7 bankruptcy, plus alternative options to consider.
What is Chapter 7 Bankruptcy?
Individuals and businesses can declare bankruptcy when they’re unable to meet their financial obligations. If successful you can discharge all or part of their debt. Chapter 7 is the most common type of bankruptcy, with 486,452 filings in 2017.
Chapter 7 bankruptcy is often referred to as “liquidation” or “no-asset” bankruptcy.
During Chapter 7 bankruptcy, a court-appointed trustee sells your non-exempt assets to repay as much of your debt as possible. Once the trustee sells the non-exempt assets, the court will discharge the remaining debts.
Who is eligible for Chapter 7 bankruptcy?
To be eligible for Chapter 7 bankruptcy, you must meet the following criteria:
- Your monthly income over the six months prior to filing must be less than the median income for a household of your size in your state.
- You must pass a means test, which requires your disposable income to be under a certain limit.
- You cannot have had a bankruptcy petition dismissed in the last 180 days due to your failure to appear before the court or comply with court orders, or if you voluntarily dismissed the filing because your creditors sought court relief to recover property they had a lien on.
What type of debt is eligible for discharge under Chapter 7?
Unsecured debt can be discharged under Chapter 7. Most unsecured debt—which is debt that doesn’t have collateral attached to it, such as a home or a vehicle—will be forgiven. This includes items like medical bills and credit card debt.
There are some debts that you can’t discharge in bankruptcy. This includes child support, alimony, certain taxes, secured loans, student loans, and debts for injury caused by driving under the influence.
You also can’t discharge debt related to secured property, such as a home mortgage or an auto loan. If you stop making payments, the lender can seize your property.
If you still owe money to the lender after they seize your property, bankruptcy will discharge that balance.
What happens to your property and assets under Chapter 7?
During bankruptcy, you’re assigned a trustee. The trustee’s job is to sell your non-exempt assets to make sure creditors are paid back as much of their debt as possible. If all of your assets are exempt, the trustee will file a “no asset” report and there will be no payments made to your creditors.
What are the personal property exemptions?
During Chapter 7, the trustee will sell most of your assets to pay your debt. However, you’re allowed to keep some of your assets thanks to the personal property exemption.
What personal property will you be able to keep? It depends where you live. Each state has their own guidelines. For example, some have exemptions for your home or car up to a set amount.
Check the regulations in your state to understand your options.
How does chapter 7 bankruptcy affect your credit?
Filing for bankruptcy will make it more difficult to access credit or borrow money for years into the future. A Chapter 7 filing is public record and will stay on your credit report for 10 years.
How much does it cost to file Chapter 7 bankruptcy?
Filing for bankruptcy can be expensive and you must pay fees upfront. The fee to file Chapter 7 is $335. If you hire an attorney to represent you, the total cost is $1,500 – $3,500.
While it looks cheaper to file yourself and avoid paying attorney fees, you’ll have a much higher chance of having your bankruptcy petition approved if you hire an attorney.
What is the process for chapter 7 bankruptcy?
The process of filing for Chapter 7 bankruptcy is quick and can usually be completed within 3-6 months. Below are 10 steps required in a Chapter 7 bankruptcy.
1) Credit counseling
2) Hire an attorney
You’re not required to hire an attorney, but it’s highly recommended. Taking a DIY approach may cause you to miss or improperly file required paperwork. You don’t want to risk having your case thrown out or some of your debts not discharged.
3) File bankruptcy paperwork
Your attorney will help you file a bankruptcy petition with the required paperwork. This includes a statement of your assets and liabilities, your income statement, and recent tax returns.
4) The court appoints a trustee
Once you’ve filed your petition, the court will appoint a trustee to oversee your case.
5) Meeting of the creditors
A meeting will be set between you, your lawyer, your creditors, and the trustee. During this meeting, the trustee and the creditors will be able to ask you questions about your finances and property.
6) Approval for Chapter 7
Within 10 days after the meeting of the creditors, the trustee will determine whether you are eligible for Chapter 7 bankruptcy.
7) Nonexempt property liquidation
Once the trustee approves you for Chapter 7 bankruptcy, they will determine whether you have nonexempt assets that are worth selling. Any proceeds from the sale will go to pay off your creditors.
8) Secured property can be reaffirmed
If you have property you want to keep that is secured by collateral (for example a car or a house), you can reaffirm the property. During reaffirmation, you create an agreement with the creditor to pay off some or all of the debt. In exchange, the creditor agrees to not repossess the property as long as you continue making payments.
9) Financial management course
Before your eligible debts can be discharged, you’ll be required to take a financial management course.
Your unsecured debts that aren’t excluded will be discharged. In most cases, this happens 60-90 days after the meeting of the creditors.
Other alternatives to consider
If you’re struggling to make debt payments, there are other options to consider before bankruptcy.
If you’re considering Chapter 7 bankruptcy because you’re struggling to pay off your unsecured debt, then debt settlement might be a good alternative.
Debt settlement helps you restructure or reorganize your debt so that you can pay off what you owe more easily. You are often able to negotiate to settle your debt for less than you owe.
Debt settlement can still affect your credit score in two ways. First, while a debt relief firm negotiates your debt repayments, you’ll stop making your regular debt payments. These missed payments will cause your credit score to decrease.
Second, if the creditor reports the debt paid as a settlement, rather than indicating that the debt has been paid in full, this can affect your score. If that happens, the settlement will appear on your credit report for approximately seven years.
Read more about the pros and cons of debt settlement vs. bankruptcy.
Chapter 7 won’t discharge any taxes that you owe. If you want help meeting your tax obligations, you may want to consider tax relief.
A tax relief firm can help you negotiate a reduction in the amount of taxes you owe or a repayment plan that you can afford.
Find out if you qualify for tax relief here.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.