Filing for bankruptcy is never an easy option.
But sometimes, it can feel like the only way to escape the grip of debt and move on with life.
Most personal bankruptcy filers will turn to Chapter 7 bankruptcy, which offers near-total debt forgiveness and a quick discharge time.
But before you can make a fresh start out of Chapter 7 bankruptcy, you should know the basics — and what to expect from the bankruptcy process.
What is Chapter 7 Bankruptcy?
In exploring your options, you will find that there are two common types of bankruptcy for individuals and couples: Chapter 7 and Chapter 13. While similar in many ways, they differ in some large areas.
Chapter 7 bankruptcy, also known as “liquidation bankruptcy”, is a bankruptcy by which individuals or couples who believe they do not have enough income to pay off debts, can free themselves by liquidating their assets. can do. You can include both secured loans and unsecured loans.
If the liquidation does not cover the entire loan, the remaining balance is usually forgiven.
Chapter 13 bankruptcy, also known as “wage earner bankruptcy,” is for people whose income or other qualifications make them ineligible for Chapter 7.
These individuals or couples will work with the trustee to create a payment plan lasting three to five years to pay off most of their debt, and they will not have to liquidate any assets for as long as they choose.
Of the two, Chapter 7 is by far the most popular. Here’s how to determine if you qualify and how to file.
A Chapter 7 bankruptcy can discharge a wide range of debt — credit card debt, tax debt, medical bills, personal loans, payday loans, even some types of student loans.
Before You Can File for Chapter 7 Bankruptcy
Before you file, you must determine if you qualify for Chapter 7 bankruptcy. Seeking professional advice from a bankruptcy attorney is the only real way to determine your eligibility, but if you haven’t committed to getting one yet, here’s what they’ll look for.
Because the grounds of Chapter 7 bankruptcy are not the means to pay your debts, the first step in the process is the “means test.”
A means test is a form that you will file with information on your income, expenses and family size to determine whether you have enough disposable income to pay off your debts.
You are more likely to qualify if your income is below the median income for your state and family size. If not, it is still possible that you may qualify. You must report your last six months of “essential” expenses to show that the money left over — your disposable income — isn’t enough to cover your loan payments.
You will need to attend a pre-bankruptcy counseling session with an approved credit counseling agency. The U.S. Department of Justice provides a list of approved credit counseling agencies in each state, but you can also do this online or over the phone.
This session is meant to give you an idea of whether you really need to file for bankruptcy or if an informal repayment plan would be better. It will also help you budget in the hope that you will not repeat the bankruptcy process in the future.
The fee for this credit counseling session can range from $25-$50 and lasts 90-120 minutes.
The last thing that could make you ineligible to file is your history with bankruptcy. You are ineligible to file if you have dismissed another bankruptcy case within the past 180 days.
You are also ineligible for discharge if you have forgiven the debt in the past eight years in a previous Chapter 7 bankruptcy case or in a Chapter 13 case within the last six years.
How much does Chapter 7 bankruptcy cost?
Once you’ve checked those three boxes, you’re ready to file. But be prepared for the expense. The initial filing fee for Chapter 7 is $338 as of 2022.
If you can’t afford the fee, you can either ask the bankruptcy court to split it into four payments or apply for a fee waiver when you are submitting your initial bankruptcy petition. If your household income is at least 150% below federal poverty guidelines, you are generally eligible for a fee waiver.
You will also need to pay a bankruptcy attorney, which can cost anywhere from $500 to $3,500, depending on where you live.
No impact on wages soon Keep your house and car Support payments can be rejected No loan limit
Damage to credit can confiscate home or car, damage to property, other debts and remain payments Pros and Cons of Chapter 7 Bankruptcy
The upside to Chapter 7 bankruptcy is great. You can discharge a lot of your debts and be able to start afresh. Other professionals include:
Chapter 7 bankruptcy can be completed in three to six months (versus three to five years for Chapter 13 bankruptcy). You must keep all your salary and wages after you file. Most states allow you to keep your home and car, especially if you are current on payments. Chapter 7 bankruptcy can assist in obtaining a family court order to dismiss child support and alimony payments. There is no loan limit to qualify.
The key aspect of Chapter 7 bankruptcy is clear: You will likely have to give up many of your valuables. But there are other drawbacks as well that you may not think of.
It will ruin your credit and remain on your credit report for 10 years. If you’re behind on your mortgage or car payments, you’ll probably have to forfeit them. You will lose any luxury property and unexempted property. This will not automatically free you from responsibility for paying alimony, child support or student loans, and the mortgage lien.
If you owe much more than you own and/or assets, Chapter 7 bankruptcy may make financial sense.
Still, while some of your assets will not be taken over and sold to repay creditors, most of it will. Chapter 7 bankruptcy may be preferable for renters who don’t stand to lose their homes or for others with few assets.
Filing for bankruptcy can also be an emotional decision for many. Keep this in mind when you are making your own decision.
How to File Chapter 7 Bankruptcy
Once you’ve determined your qualifications and calculated the costs, things really move forward. Here’s a step-by-step guide to the process, whether you hire an attorney or not.
1. Find a Bankruptcy Lawyer
When you’re struggling financially, the extra expense of a bankruptcy attorney can feel like the only thing you can’t afford. But Chapter 7 bankruptcy has long-term legal and financial implications, the process can be complicated and you may only get one shot at fixing it.
Paying an expert to guide you through the bankruptcy process can be money well spent. Although you can represent yourself in your Chapter 7 bankruptcy.
2. File Your Formal Petition
Your formal Chapter 7 bankruptcy petition involves submitting several bankruptcy forms and your filing fee or exemption application to your local bankruptcy court.
3. Submit Documents to the Bankruptcy Trustee
You must submit proof of the information you provided in your initial petition to your bankruptcy trustee. The trustee will be in charge of executing your bankruptcy. They’ll round up your property, sell it, challenge creditors when needed, and monitor your eligibility for Chapter 7 throughout the proceedings.
3. Attend the meeting of creditors
After filing you will attend a meeting with your trustees and creditors. You and your trustee will review the documents you sent them to creditors, and they, in turn, will inquire about your finances and assets.
This is usually the end, unless more investigations or documents are needed, in which case your trustee will schedule another meeting.
Keep in mind that if you don’t make it to your meeting, the court will dismiss your bankruptcy case.
4. Take Debt Education Courses
In order to receive your discharge, you will need to take another course called a Debtor Education Course, which you can do earlier in the process. This is about two hours long and can usually be taken with the same agency you consulted with prior to bankruptcy.
You don’t want to delay it. You only have 60 days to file your completion certificate with the court after the initial meeting of creditors.
Failing to file your completion certificate will result in the court dismissing your case, and you will need to pay a re-filing fee to re-open it. You will probably have to file an additional petition requesting that they accept the late certificate.
5. Receive Your Discharge
Once you have followed the steps, the court will officially discharge your eligible debts and close your case.
Be sure to hold on to your discharge order, as creditors will no longer have a claim on your debt, yet some may try to come to terms with it. All you have to do is send them a copy of that discharge order to get them off your back.
What to Expect After Filing Chapter 7 Bankruptcy?
Between filing and discharge, there are a few events you should pay attention to.
Once you file bankruptcy, creditors and collectors need to stop trying to collect your money while the case is pending. This is called “automatic migration”.
If a company continues to attempt to collect during the stay, it is violating a court order. Tell the company in writing, and the collection will stop. If they don’t, notify the bankruptcy court, and they’ll likely litigate the company.
confiscation of property
Your trustee will handle all this for you. In the unlikely case that your home is one of those assets, the trustee cannot come without first consulting you. And if there is a disagreement about what is included in the bankruptcy estate, you or your attorney can file a bank form to dispute.
obtaining a reaffirmation agreement
For secured loans that you want to hold — usually your primary mortgage and car loans — you’ll need to sign a reaffirmation agreement for each loan, which will waive the discharge of that particular loan. These will be sent to your attorney and will need to be signed by both you and the creditor before you can receive the discharge order.
Jane Smith is a former staff writer at The Penny Hoarder and the author of “Meal Planning on a Budget.” She shares tips on saving money and paying off debt on Instagram at @modernfrugality.
Senior Editor Joanna Strickland contributed.
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