Chapter 7 Bankruptcy Explained: Requirements and Steps
Bankruptcy is never anyone’s first choice. But for those who find themselves in a difficult and un-workable financial situation declaring Chapter 7 bankruptcy may be the best long-term option. There are several types of bankruptcy, but here we’ll explain Chapter 7 bankruptcy and describe eligibility requirements, steps, required forms, and practical considerations. Chapter 7 bankruptcy allows an individual debtor a fresh start by discharging most types of debts, regardless of the size of the debts.
Chapter 7 bankruptcy explained
This is the most common type of bankruptcy filing. Within 90 days of filing you can have debts including credit cards, medical bills, and personal loans forgiven with no obligation to ever pay them back. However, in order to complete Chapter 7 bankruptcy, the debtor will need to liquidate most valuable assets and property to pay off some of their debts. Some assets are exempted like retirement accounts, equity in property, a basic car, and household items in order to allow the filer to have a chance for success post-bankruptcy. Know that debts like student loans, child support, and tax debt aren’t dischargeable under Chapter 7. There are certain eligibility requirements and documentation needed to complete the filing.
What are the eligibility requirements?
To be eligible, the primary requirements for the individual or married couple filing are passing the “means test”, credit counseling, and providing the courts with clear financial documentation. Means test: prior to filing Chapter 7, individuals with more than 50% consumer debt (those with less than 50% are exempted) will need to complete the means test calculation form. The purpose of this test is to determine if you have enough disposable monthly income to continue to pay off debts and avoid bankruptcy. While the specifics are more complicated, in short, if your household income over the previous six months is less than the most current median family income for your state then you qualify for bankruptcy. Credit counseling: this is often a prerequisite step for any individual looking to file. The goal is to help educate on various options aside from bankruptcy and be sure the individual is financially well informed prior to moving forward. While it’s a relatively simple requirement, failure to document meeting this can result in a dismissed application and additional fees. See a government approved list of credit counselors for your state. Other requirements: even in bankruptcy filing, the individual is required to pay court filing fees, submit income and expense documentation, and categorize all debt that they are seeking to get discharged. To succeed in filing for Chapter 7 bankruptcy, most people will need to have clear documentation of their finances including past income, expenses, and proof that they no longer possess valuable property that could help reduce their debt.
What are the steps?
Step 1 – prior to filing: The means test and credit counseling the two main pre-requisites to filing Chapter 7. Though there are a number of required forms that a person seeking Chapter 7 will need to complete prior to filing. The United States Courts describes in detail what individuals filing for Chapter 7 will need to provide the court including: a list of all creditors, the amount of the debt, and the nature of the debt; the source and amount of their income; a list of all property; and a list of all monthly expenses. Step 2 – after filing: Even before it’s official, filing a petition for Chapter 7 will provide immediate relief to the debtor. During the bankruptcy process they are no longer required to pay debts and creditors aren’t allowed to garnish wages or even to call to request payment. After filing for Chapter 7 an individual can expect to be assigned a case trustee who will invite all creditors to a meeting where the debtor is put under oath and asked questions by the trustee and sometimes creditors too. The debtor may be required to submit additional documentation. If the debtor has non-exempt assets, the trustee will organize a liquidation of those assets to pay off some of the debt. However, most Chapter 7 cases are “no-asset” where the filer has no assets, or only protected, exempt assets. Step 3 – officially discharging debt: this is the bittersweet moment that all Chapter 7 filers are waiting for. It’s usually a 3-5 month process from the initial filing date to the discharge date. Once a Chapter 7 filing is approved, the debt relief the filer was seeking is granted. This usually means that credit card debt, medical bills, and other eligible debts are completely wiped away. The primary reason a filing is denied usually involves criminal activity like perjury, fraud, or intentionally hiding assets.
Other practical considerations
Wiping out debt can be an appealing and financially smart decision for those overwhelmed and restricted by a mountain of medical bills, credit card debt, or personal loans. It is a financial fresh start, but it certainly comes at a future cost. Consequences of Chapter 7 bankruptcy: Chapter 7 can result in a huge amount of debt relief. But there are clear downsides to filing for Chapter 7. To start, you’ll lose all your non-exempt assets. After filing, the bankruptcy will stay on your credit report for up to 10 years, completely sinking your credit score and any chance to get a mortgage or other loan. You also won’t be able to get credit cards and you still may need to pay student loans and any mortgage lien. Once you file for Chapter 7, you won’t be able to file again for at least 6 years if you run into worse times down the road. Finally, the impact of filing for bankruptcy on an individual’s psyche, social, and professional circles is an important additional consideration. Life after Chapter 7: Though a financial set-back, filing for bankruptcy isn’t necessarily a barrier to future success. If one gets their financial life in order, develops good habits, and hopefully has good luck, they can be financially successful after bankruptcy. All the consequences of filing are time-limited. For many, Chapter 7 bankruptcy is the end of their financial challenges and acts as the fresh start it’s intended to be.
Debt can alter someone’s life in a profoundly negative way. It can lead to toxic stress, mental health struggles, and more. Chapter 7 bankruptcy is one way out of overwhelming debt. But in many cases it should be a last resort option. Anyone considering filing for Chapter 7 bankruptcy should consult with an attorney, credit counselor, or other financial professional to determine if the benefits are greater than the costs in their particular situation.