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What is Chapter 7 Bankruptcy?

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If you’re having difficulty staying on top of your bills, I bet you can imagine how good it would feel to be completely debt free.

But being debt free is not something that magically happens overnight, it takes a lot of time and effort in order to get yourself out of debt.

So what if you’ve tried over and over again on your own and you just haven’t gotten anywhere?

This is when you might consider filing bankruptcy.

But what does filing bankruptcy entail? And what will that mean for your financial future?

We’ll give you the answers to these and more as we go over Chapter 7 bankruptcy.

We’re going to cover:

What is Chapter 7 Bankruptcy?

Chapter 7 is also known as liquidation bankruptcy, or straight bankruptcy. Typically, when people are considering filing bankruptcy, Chapter 7 is the most common type.  

Chapter 7 bankruptcy discharges most of your unsecured debts, such as:

  • Credit card debt
  • Personal loans
  • Medical bills

How does Chapter 7 Bankruptcy work?

Chapter 7 is a good option for those that have exhausted all of their other options.

Let’s say that you:

  • Worked with credit counselors
  • Consolidated your debt
  • Tried negotiating your debt with your creditors

But no matter what you do, you can’t seem to get yourself out of debt. This is when you might start to consider bankruptcy as your option.

When you file a Chapter 7 bankruptcy, collection action against you will stop and the court will assign a trustee to oversee your case.

The trustee’s job is to take your non exempt assets and sell them off. Each state has its own laws on the classifications of what falls under exempt and non exempt items. 

Exempt properties include:

  • Motor vehicle (up to a certain value)
  • Jewelry (up to a certain value)
  • Pensions
  • Household appliances
  • Furniture
  • Clothing
  • Tools or equipment needed for your profession

Nonexempt properties include:

  • Second or vacation home
  • Second car
  • Cash
  • Bank account funds
  • Stocks and bonds
  • Stamp/Coin or other valuable collection
  • Family heirlooms
  • Musical instruments (unless debtor is a professional musician)

Once the money is obtained, it will be distributed among the creditors who filed proper claims in order to settle your debts.

With a Chapter 7 bankruptcy, all unsecured debt will be wiped out.

These unsecured debt include:

  • Credit card debt (including overdue payments and late fees)
  • Collection agency accounts
  • Medical bills
  • Utility bills (anything that is past due only)
  • Business debts
  • Money owed under lease agreements
  • Revolving charge accounts

Keep in mind that depending on where you live is going to be determine which assets you could potentially lose when filing a Chapter 7 bankruptcy. You should speak with a lawyer in your state to help you better determine what these are. 

Who Qualifies for Chapter 7 Bankruptcy?

In order to determine if you qualify for a Chapter 7 Bankruptcy, you’ll be asked to take an income test called “means test”.

This test determines if your average monthly income is above or below the median income for a family of your size that lives in your state.

But how does this means test determine whether you qualify or not?

The means test compares your monthly average income for the last 6 months before filing the bankruptcy, with the income of a household similar to yours in your state.

If are below the median level for the state you live in, that makes you an eligible candidate for Chapter 7.

How To File Chapter 7 Bankruptcy

It’s important that you have an idea of what the process will be and what you’ll need to do to make it easier for you. 

Here they are:

Step 1: Get Credit Counseling

You must complete a credit counseling course within 180 days from the moment you file your Chapter 7 petition. This course should be from a government approved agency or education provider.

Step 2: Hire an Attorney

You should hire an attorney if credit counseling determines that bankruptcy is your best option. The advantage of having an attorney on your side is that they will be able to complete all the proper paperwork, as well as guide you through the process based on their experience.

Step 3 : Take the Means Test

This will help determine if you qualify for the Chapter 7 bankruptcy or if you will need to file for Chapter 13 instead.

Step 4 : Complete Chapter 7 Bankruptcy Forms

You’ll complete the paperwork, or your lawyer will complete it for you. If you are adding a spouse to the bankruptcy, you’ll only need to submit one set of forms with with both of your information on it.

Step 5: List Your Creditors

You must create a list of all of your creditors, which will be used by the court to contact them and see if any of them respond and file a payment claim against your bankruptcy estate.

Step 6: File Your Petition

Once all the paperwork is completed and all of your creditors are listed, your attorney will submit to the court:

  • Your completed form
  • Schedules
  • Creditor matrix ( your list)
  • Credit counseling certificate
  • Debt repayment plan

All of this information will be complied by your attorney, so no need to worry if you are not familiar with something.

Step 7: Collection Efforts Cease

All of your creditors will cease collection efforts immediately after submitting your petition.

Step 8: Court Takes Over

The court will assign you a trustee that will take care of selling your assets and paying off your creditors.  

Step 9: Contact Your Trustee

You’ll receive a notification a few days after filing your petition that will provide the name and contact information of the case trustee assigned to oversee your case.

You should contact your trustee and request a meeting to discuss your case and make sure that you are aware of the whole process.

Step 10: Provide Your Financial Documents

You’ll need to hand your case trustee copies of:

  • Pay stubs
  • Tax returns for recent year
  • Unfiled returns from previous years
  • Any returns filed while you opened your case.

These documents should be provided to the case trustee seven days before your meeting of creditors.

Step 11: Filing Announcement by the Court

The court will send a notice of your Chapter 7 bankruptcy case to all of the creditors that you listed within 15 days of you filing your petition.

Step 12: Hearing with Creditors

You’ll receive a notification from the court stating the date and location of your mandatory meeting with your creditors.

This will take place some time between 21 to 40 days after filing your petition. The creditors will be given 60 days to respond with any challenges.

Step 13: Court will Determine if your case is good for Chapter 7

Within 10 days after the meeting with creditors, your case trustee will report to the court whether your case will move forward or if it’s presumed to be ”abusive.” This means that your disposable income is too high for Chapter 7 and you instead you’ll have to file for Chapter 13 instead.

Step 14: Complete a Financial Management Course

This is a longer course than the credit counseling one. Once you finish you will receive a certificate stating that you have met the requirements.

This step should be completed and you’ll need to file your certificate to court prior to discharge.

If the certificate is not received, your case will be dismissed and none of your debts will be eliminated.

Step 15: Judge Orders Discharge

Usually within 60 to 90 days after you’ve met with the creditors, the judge will send a “Discharge of Debtor Notice” to you and your creditors to discharge your case.

If an interested party files a complaint objecting to the discharge, your discharge will not take place and your attorney will need to defend you in court against the objection.

If everything goes fine and no objections occur, all of the qualifying debt will be eliminated and your Chapter 7 bankruptcy will be discharged.

Top 7 Bankruptcy FAQs Answered

1. What if you don’t qualify for a Chapter 7 bankruptcy?

If your means test reveals that your monthly income is above the median level for your state, you’ll be given the option to file for a Chapter 13 bankruptcy instead.

2. What Happens to Your Property and Assets in a Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a liquidation bankruptcy, which means that most of your possessions will be sold to settle your existing debts.

If you’d like to try and hold onto some assets like a home or car, you should consider one of the other chapters of bankruptcy.

3. How Will Chapter 7 Bankruptcy Affect Your Credit?

One of the biggest consequences of filing bankruptcy is the fact that it will hit your credit, lowering your credit score and keeping it down for a long period of time. 

Your credit score will decrease immediately upon filing bankruptcy, and it will remain on your report for up to 10 years.

Over time, you will be able to increase your score again through responsible use of credit.  As you continue to make on time payments, your credit will increase little by little.

Keep in mind that rebuilding your credit isn’t something you can do overnight and it will take time and dedication to see an improvement in your score. 

Improve your score by:

  • Keeping credit cards in a low balance
  • Making payments on time
  • Not exceeding your limit on new accounts in a short period of time.

After your bankruptcy is discharged and you are able to qualify for new credit again, be aware that you will be facing higher interest rates because of the bankruptcy on your credit history.

You should focus on rebuilding your credit after you have completely been discharged from the bankruptcy.

4. What Property Can You Keep in a Chapter 7 Bankruptcy?

When you file a Chapter 7 Bankruptcy, some of your personal property is exempt from being sold. But, there are limits to the value of exemptions.

You will find that there are federal exemption rules as well as state exemption rules. Depending on the state that you live, they could give you the ability to choose whether you’ll want to use the federal or the state guidelines.

On the other hand, some states will demand that you use the state exemptions.

The last federal bankruptcy exemptions were adjusted in 2016, and every three years the federal exemptions changes. This means that the next adjustment should be some point throughout this 2019.

The Federal Bankruptcy Exemptions

The amount that will be provided by category will apply to each individual filing. If a married couple is filing, the amounts can be doubled per category.

  • Homestead Exemption: An amount of $23,675 in home equity.
  • Motor Vehicle: Up to $3,775.
  • Household good or Personal Property: $12,625 ($600 maximum for each individual item) This includes appliances, books, musical instruments, and pets, these may not exceed the $12,625 maximum.
  • Retirement Accounts: Tax exempt retirement accounts are exempt without regard to value, except that IRAs and Roth IRAs are capped at $1,283,025.  
  • Health Aids: The entire value is exempt.
  • Unmatured life insurance: The entire value is exempt.
  • Loan value in life insurance: $12,625
  • Jewelry: Up to $1,600.
  • Tools of the trade: $2,375
  • Social security, unemployment, veterans benefits, public assistance, disability: The entire value is exempt.  
  • Education IRA and pre-purchased tuition credits: The entire value is exempt.
  • Spendthrift trust: The entire value is exempt.   

5. Will All Your Debts Be Eliminated If You File for Chapter 7 Bankruptcy?

When you file for a Chapter 7 bankruptcy, certain debts will not be eliminated and you’ll still be obligated to repay them.

For instance:

  • Student loans – These loans can’t be discharged through a Chapter 7 bankruptcy. The only way you can get them discharged is if you are able to prove that you are permanently ill or injured, which will prevent you from repaying.
  • Alimony and child support – Bankruptcy code states that alimony debt and child support is non dischargeable.
  • Recent tax debt – Any tax debt within the last three years from the day you submit your Chapter 7 bankruptcy. Anything prior to that is a different story, and debt that is older than three years can be discharged if certain tax filing rules are followed.

6. How Much Does It Cost to File for Chapter 7 Bankruptcy?

If you decide to file a Chapter 7 bankruptcy, you’ll be asked to pay a $335 filing fee. If you can’t afford this amount right there and then, you can ask the court if they can grant you permission to pay these fees in four monthly installments.

Using a bankruptcy lawyer to represent you will require additional fees which you will be responsible for.

7. Which financials are examined for the Chapter 7 Bankruptcy Means Test?

To complete the means test, the following will be examined:

  • Financial Records
  • Income
  • Expenses
  • Secured Debt
  • Unsecured Debt

The income limit will be determined by state, as each state limits vary.

Pros and Cons of Bankruptcy

Pros

  • All aggressive collection action and harassment will end. 
  • Chapter 7 is an easy process that will help you eliminate most of your unsecured debt.
  • You should receive a discharge around 4 to 6 months after you file the Chapter 7.
  • In some cases your credit score can improve when a Chapter 7 bankruptcy is filed, since creditors won’t continue reporting your late payments to the credit bureaus.
  • Emotional relief 

Cons

  • Bankruptcy will remain on your credit report for up to 10 years
  • You will not be left with any open credit accounts.
  • Your non exempt properties will be sold.
  • You will still be responsible for any student loan debt, as well as any alimony or child support payments.
  • Bankruptcy court can switch your Chapter 7 to a Chapter 13 bankruptcy, which will increase the time of discharge from 4 to 6 months to 3 to 5 years.
  • Must meet with trustee 
  • Bankruptcy court fees are not able to be modified or waived, and need to be paid at the time of filing. 
  • Attorney fees can be costly.
  • Required to take a credit counseling and financial management course

Conclusion

Filing for chapter 7 bankruptcy is never an easy decision, but it could be the relief you need if you’re struggling to pay your bills and have not had success getting out of debt on your own.

Be sure that you understand the process and the possible consequences that could result from filing bankruptcy, before you take the leap. The last thing you want is to jump head first into a serious legal decision without understanding the repercussions.

Are you considering filing for Chapter 7 bankruptcy? What else do you need to know in order to make a decision? 

Up Next: The Bankruptcy Definition Explained

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