What is Chapter 7 bankruptcy? Should I file a lawsuit? What is the best way to file?

In the United States, Chapter 7 bankruptcy is a strong legal instrument that enables you to eliminate various obligations, such as credit card debt, medical debt, auto loans, and payday loans. Over 39 million Americans have filed for bankruptcy, according to experts. [1] It occurs more often than most people believe.

If you’re contemplating Chapter 7 bankruptcy, one good question to ask yourself is: do I have more debt than I’ll ever be able to repay, given my current income and assets? If you answered yes, Chapter 7 bankruptcy might be the best choice for you.

What exactly is Chapter 7? What is the mechanism behind it?

In a Chapter 7 bankruptcy, you’ll fill out and submit paperwork detailing everything you earn, spend, own, and owing to the bankruptcy court. If you’re working, you’ll also need to provide recent tax returns and pay stubs.

Your paperwork and papers will be reviewed by a trustee, who is an official assigned to your case. You’ll meet with them for a short meeting during which they’ll ask you some basic questions regarding the information on your paperwork.

You’ll get a letter in the mail from the court confirming your bankruptcy discharge a few months later. The overwhelming majority of honest individuals complete their bankruptcy papers completely and follow all necessary procedures to get their bankruptcy recognized by the court.

What debts may be forgiven and which cannot?

The following typical debts may be discharged in Chapter 7 bankruptcy:

  • Debt on a credit card
  • Medical expenses
  • Loans for automobiles
  • Personal loans and payday loans are two types of loans.
  • Credit card and debt collection agency judgments
  • Bills for utilities

These are referred to as “dischargeable” debts.

When a person files for bankruptcy, a regulation is known as the “automatic stay” takes effect. This prevents anybody from collecting any debts you owe them for the time being.

The following debts are not dischargeable in Chapter 7 bankruptcy:

  • Child support and alimony are two types of alimony.
  • Recent tax obligations, as well as other government debts such as penalties
  • Student debts are seldom forgiven.

Non-dischargeable debts are those that are not forgiven.

Secured debts, such as a mortgage-backed by a home or a vehicle loan backed by a car, are obligations that are guaranteed by a property. Secured debts may be discharged in Chapter 7 bankruptcy if you are prepared to give up the property. 

You cannot eliminate debt in Chapter 7 bankruptcy if you wish to retain the property that secures the obligation. Before you file, make sure you’re up to date on your debt payments.

Is it possible for me to retain my property if I file for Chapter 7 bankruptcy?

People are allowed to retain all of their property in 95 percent of Chapter 7 bankruptcy proceedings.

The Bankruptcy Code has provisions known as “exemptions” that enable you to retain some kinds of property, including cash, clothing, furniture, vehicles, and so on, up to a specific monetary amount known as “exemption limitations.”

Your state determines the exemptions you may utilize to retain your property. Many states offer “wildcard exemptions,” which enable you to retain any property if its value is less than a specified amount. The wildcard limit for the 19 states that provide “federal bankruptcy exemptions” is a little over $10,000, which means you may retain property worth less than $10,000.

If the value of your property exceeds the applicable exemption level, the trustee may take and sell it to repay your creditors. This is why Chapter 7 is referred to as a “liquidation bankruptcy,” even though no liquidation occurs.

Nonexempt property is defined as property that is not protected by exemptions. Expensive vehicles and houses are the most frequent types of nonexempt property.

Who is eligible to file for Chapter 7 bankruptcy? Should I file a lawsuit?

There’s a distinction to be made between who is permitted to file and who should file.

Most individuals who earn less than the state’s median income for their family size are eligible to file. This is because, according to bankruptcy rules, they satisfy the “means test.” The means test considers your average monthly income over the previous six months.

You will most likely qualify for Chapter 7 bankruptcy if you don’t have a job or make less than the minimum wage. You can file a Chapter 13 bankruptcy if you don’t pass the means test, but not a Chapter 7.

People seeking a new beginning usually fall into one of three categories:

  • Those who should file for bankruptcy under Chapter 7 right now;
  • Those who should wait a few months before filing for Chapter 7 bankruptcy;
  • Those who should not file for bankruptcy under Chapter 7.

Is it necessary for me to file for Chapter 7 bankruptcy right now?

Here are some indications that you may be a suitable candidate for bankruptcy right now:

  • You owe more than $10,000 in debt that may be discharged.
  • You already have a poor credit score (below 600)
  • You don’t have any costly real estate.
  • Keeping up with bills is preventing you from making ends meet every month.
  • You’re concerned about having your wages garnished or being sued for debt.
  • You pass the means test since your income is less than the state’s median.
  • You don’t see how you’ll be able to pay off your debt in the next five years.

If any of these apply to you, now is a good time to file for bankruptcy.

Who should file first?

Certain actions may make a Chapter 7 bankruptcy more difficult, and waiting a little longer can assist. It’s advisable to file and pay off your most recent charges first if you still depend on your credit cards to make ends meet or if you’ve made big expenditures in the past six months.

If you paid back or transferred the property to a family member or acquaintance during the past year, you should file as soon as possible. These activities must be disclosed in your bankruptcy papers, and your trustee will inquire about them.

If you’re suing someone or intend to sue someone, you should wait to file bankruptcy until you know the ultimate result of the case, if at all feasible. When people are anticipating a personal injury compensation, they often postpone filing for Chapter 7 bankruptcy.

Also, if you owe your landlord money and aren’t planning on moving, attempt to make up any missing rent payments before filing. If you wish to retain the vehicle, the same is true for car loans.

Finally, you may wish to postpone filing if you anticipate your financial position to worsen. You can only declare Chapter 7 bankruptcy once every eight years, so you don’t want to do it if you’re about to get into additional debt.

Bankruptcy Chapter 7 vs. Chapter 13

The major distinction between Chapter 7 and Chapter 13 bankruptcy is that under Chapter 13 bankruptcy, no obligations are instantly discharged. Based on your capacity to repay specific obligations, you suggest a repayment plan. 

The bankruptcy trustee and other creditors evaluate the Chapter 13 plan, and if it’s acceptable to everyone, the court approves your three- to a five-year repayment plan.

For two reasons, most individuals choose Chapter 13 bankruptcy over Chapter 7. First, they fail the means test because of their high income and are not eligible for Chapter 7 bankruptcy. Second, they possess a house that isn’t protected by the Chapter 7 bankruptcy exemptions and wishes to retain.

If you’re thinking about filing Chapter 13 because you didn’t pass the means test, examine the reasons why. The means test has a six-month lookback period, so if your family income has just decreased, you may be eligible for Chapter 7 shortly.

How to File for Bankruptcy Under Chapter 7

  1. Gather your financial records.

If you’re working, this typically simply entails obtaining your most recent pay stubs as well as your income tax returns for the last two years. Obtaining your most current bank statements and credit report is also a smart idea.

  1. Complete the bankruptcy paperwork.

Your bankruptcy petition is the name for these documents. They ask you how much money you make, how much you spend, how much you own, and how much money you owe. People may either employ a lawyer to fill out these papers for them or fill them out themselves. They may be found on the United States Courts website.

  1. Enroll in a credit counseling program.

Any certified nonprofit credit counseling organization may provide you with a 60-minute online course. You’ll get a completion certificate, which you’ll provide to the court.

  1. Fill out and submit your bankruptcy papers to the bankruptcy court.

If you have a lawyer, they will submit the paperwork on your behalf. If your court permits it, you may do this by mail, in person, or online. At this moment, you’ve completed 80% of your job. However, you must perform a few post-filing activities.

  1. Send the necessary papers to your trustee.

The bankruptcy court will appoint a trustee for you. Even though this isn’t a judge, they are nonetheless in charge of your case. 

They’ll almost certainly want you to email or send them the same papers you submitted with the court, as well as perhaps additional documents like bank statements.

  1. Take a money management course, if you haven’t already.

This online personal finance course is similar to the one you take before filing your taxes. It will prepare you for life after bankruptcy for 60 minutes. Make sure you submit the completion certificate to the court.

  1. Attend your “341 meeting,” which is a short meeting with your trustee.

The majority of 341 sessions take 5-10 minutes and follow a set of questions. They’ve been taking place through phone and video conferences at COVID-19.

  1. Get a copy of your discharge letter.

If all goes according to plan, this will happen around 2-3 months following your 341 meetings. Congratulations.

How long does it take to file for Chapter 7 bankruptcy?

If you’re organized, you should be able to submit your bankruptcy paperwork in less than a week. One to two months after you file, you will have a 341 meeting with the trustee overseeing your case.

If everything goes well, you should get a notice in the mail two to three months after your appointment with your trustee stating that your debt has been legally dismissed. This implies that it takes approximately 3-5 months from the start of your 

Chapter 7 bankruptcy to have your debts discharged.

How much does it cost to file for Chapter 7 bankruptcy?

A filing fee of $338 is required by the bankruptcy court. You may be eligible for a fee waiver if your income is less than 150 percent of the federal poverty level. Fee waivers are typically available to those on social security or who are jobless. 

If you submit a request and the court approves, you may pay the cost in installments.

The two online personal finance courses cost between $10 and $50 apiece depending on the supplier. Based on your income, you may be eligible for a price waiver for these courses.

The most costly expense in bankruptcy is the attorney charge if you employ one. The average cost of hiring a bankruptcy attorney for a Chapter 7 case is $1,500.

What is life like after bankruptcy? What is the duration of a Chapter 7 bankruptcy on your credit report?

Most individuals who declare Chapter 7 bankruptcy are relieved that all of their credit card and medical debt, as well as any other dischargeable obligation, has been eliminated. If your credit score is below 600, you may notice an improvement in your credit score.

People frequently get a new feeling of confidence due to the bankruptcy procedure, and they are more comfortable with their financial problems than they were before. The two compulsory personal finance courses are one of the reasons. In addition, Chapter 7 bankruptcy requires you to consider your financial position.

People who file for Chapter 7 bankruptcy are more likely to become serious about budgeting, saving, and repairing their credit using credit builder loans and secured credit cards.

Although Chapter 7 bankruptcy remains on your credit record for ten years, many individuals who file see their credit improve and can get a mortgage within a few years if they make excellent financial choices after filing.

Chapter 7 Bankruptcy Alternatives

Alternatives to bankruptcy may be able to assist you in obtaining a new start. Your financial position and the kinds of obligations you owe will determine which option is best for you. Let’s take a look at each option.

Debt Settlement:

You have the option of negotiating with your creditors. If you’ve gone behind on payments or are likely to fall behind, you may talk to your creditor about it. You may be able to work out a payment plan that works for you or negotiate a debt settlement for less than the entire amount due. 

This is particularly true when it comes to credit card debt. In most cases, a settlement must be paid in one single amount.

Repayment Plan:

Another alternative is to enter into a debt management plan with a debt collection agency. Unlike debt settlement, a debt management plan entails repaying your debt over time and on more manageable terms than you now have. A debt management strategy may usually only cover unsecured obligations.

Debt Consolidation: 

Another debt relief option is to take out a debt consolidation loan to pay off your obligations. You’d just have to make one monthly payment to the new creditor after that. These loans often have cheaper interest rates than the ones you’re currently paying.

Another alternative is to sell valuable assets to repay creditors. But be cautious. You may not be able to pay off or satisfy all of your debts with the money you get for your property. You may have to file for bankruptcy anyhow.

Conclusion

Your financial circumstances and other debt-relief alternatives will determine whether or not you should apply for Chapter 7 bankruptcy. It’s also crucial to think about the filing deadline. Enroll in a credit counseling course or request a free consultation with a bankruptcy attorney to understand more about your choices.

 

Tags

bankruptcy process
unsecured debt
credit counseling agency
taxes debts
student loans
common forms