How Does Chapter 7 Bankruptcy Work?

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a legal process that can help individuals clear away debts quickly. It involves selling nonexempt assets to repay creditors, providing a fresh financial start. If you’re struggling with debt, understanding how Chapter 7 bankruptcy works can be crucial.

Once you file for Chapter 7 bankruptcy, the court places a temporary stay on your debts, halting debt collection efforts, home foreclosure, wage garnishment, property repossession, eviction, and utility turn-off. A court-appointed trustee will review your finances, sell certain nonexempt property, and use the proceeds to repay your creditors. The court will then discharge the remaining eligible debts, giving you a clean slate.

What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Chapter 7 and Chapter 13 are the two common types of bankruptcy available to individuals. While both can help manage debts, they have significant differences:

• Chapter 7 Bankruptcy: This type can wipe out certain debts within several months. However, a trustee can sell your nonexempt property to pay creditors. You must have a low income to qualify.
• Chapter 13 Bankruptcy: This type allows you to keep your assets and get on a more affordable repayment plan with your creditors, usually lasting three to five years. You need enough income to afford the payments and must be below the maximum total debt limits.

Who Qualifies for Chapter 7 Bankruptcy?

To qualify for Chapter 7 bankruptcy, you must meet certain requirements:

• Credit Counseling: Complete an individual or group credit counseling course from an approved agency within 180 days before filing.
• Income Limits: Your average monthly income during the previous six months must be less than the median income for a similar-sized household in your state, or you must pass a means test.
• No Recent Bankruptcies: You can’t have filed a Chapter 13 bankruptcy in the past six years or a Chapter 7 bankruptcy in the past eight years.
• No Fraud: The court could dismiss your case if it determines you’re trying to defraud your creditors.

What Debts Are Discharged in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy generally discharges unsecured debts, including credit card debt, unsecured personal loans, medical bills, and payday loans. However, some types of unsecured debts usually aren’t discharged, such as child support, alimony, student loans, certain tax debts, and court fees.

What Is Exempt vs. Nonexempt Property in Chapter 7?

When filing for Chapter 7 bankruptcy, there’s a distinction between exempt and nonexempt property:

• Exempt Property: Property you can keep, up to a certain value limit. This includes a homestead exemption, personal property, vehicles, jewelry, tools of trade, retirement accounts, and public benefits.
• Nonexempt Property: Property that exceeds the exemption limits, such as cash, family heirlooms, expensive vehicles, antiques, luxury clothing, and investments not in retirement accounts.

How to File for Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy involves several steps:

1. Attend Counseling: Complete a credit counseling course from an approved agency within 180 days of filing.
2. File Your Forms: List your property, exemptions, creditors, income, recent transactions, and other financial information on your bankruptcy forms.
3. Send Verification Documents: Provide the bankruptcy trustee with documents to verify your forms, such as bank statements, tax returns, and paychecks.
4. Attend the Creditor Meeting: Meet with the trustee to answer questions about your paperwork and situation.
5. Attend Budget Counseling: Complete a second course from a counseling agency within 60 days of the creditor meeting.
6. Wait for the Discharge Notice: Once the court receives your certificate of completion, it can discharge your debts, usually within 60 to 75 days of the creditor meeting.

Chapter 7 Bankruptcy and Your Credit

A Chapter 7 bankruptcy record stays on your credit reports for up to 10 years from the filing date. While it may hurt your credit for years, it could be your best financial move. Monitor your credit reports to ensure the included debts are correctly reported as discharged once you complete the bankruptcy process.