Do you have unmanageable bills? Have things gotten to the point that they are out of control, and you are going from paying bills on time and having a rainy-day fund to now teetering on the edge of bankruptcy?
It can happen to anyone. Did you know that 20% of bankruptcy filers have college degrees? You are not alone. A Chapter 7 bankruptcy may give you the fresh start you need.
Debt relief. Without bankruptcy.
Please, please, please… don’t do bankruptcy without trying this method first.
Table of Contents
What is Chapter 7 bankruptcy?
According to USCourts.gov, “A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in Chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code.”
Chapter 7 is also known as “liquidation bankruptcy” and can erase many types of consumer debt, including credit card debt and medical bills. Many people saddled with consumer debt from department stores, bank loans, and other such debt may file for Chapter 7 too.
Chapter 7 bankruptcy is one of the most powerful debt relief options available in the United States. It has helped many people get out of poverty and get a clean financial slate. It gives you a fresh start by erasing your debts.
All bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code.
What happens when you file for Chapter 7 bankruptcy?
An automatic stay will immediately go into effect. This is an injunction that protects an individual debtor from creditors’ collection activities and will halt any judicial or administrative collection proceedings.
A bankruptcy trustee will review your forms and documents. They’ll also hold your 341 Meeting of Creditors, where they’ll ask you questions about your finances under oath, and if this is the address on the petition, your current address? Did you sign the petition, schedules, statements, and related documents, and is the signature your own? Before you signed, did you read the petition, schedules, statements, and associated documents?
The 341 meetings, or “creditors’ meeting” can be held in a meeting room or a courtroom. Creditors are not required to attend these meetings and do not waive any rights if they do not attend. When the case is called, the bankruptcy trustee will place you under oath and ask to see a photo ID and documentation of the debtor’s Social Security number.
Most honest people fill out their bankruptcy forms and complete the required steps to get their bankruptcy petition accepted by the court and their eligible debts erased. It takes about four to six months to complete the bankruptcy process. You will get a notice from the court letting you know that the court has granted you a bankruptcy discharge.
What are the requirements for Chapter 7 bankruptcy?
Requirements to file for a Chapter 7 include:
- You must pass a means test that looks at your income, expenses, and assets.
- You cannot have filed a Chapter 7 in the past eight years or a Chapter 13 in the past six years.
- You cannot have filed a petition for Chapter 7 or 13 in the last 180 days that the filing was dismissed because of failure to appear in court or comply with court orders, or you dismissed your filing because creditors sued to recover the property they had a lien on.
- A credit counseling certificate of completion must be obtained before filing for bankruptcy. You will have to complete this class through a credit counseling agency. A second course will be required during the bankruptcy case. These two courses will cost anywhere from $10 to $50 each.
If the debtor is seeking an exemption to the counseling certificate, they can either:
- Submit a different certificate describing exigent circumstances that merit a waiver of the requirement and also states the debtor requested credit counseling but was unable to obtain credit counseling during the seven days before filing; OR
- Request, in writing, and provide notice that the debtor cannot obtain credit counseling because of incapacity, disability, or active military duty in a military combat zone.
Chapter 7 bankruptcy court filing fees
There is no real way to file for free, even if you qualify for hardship exemptions. The petition court filing fee for Chapter 7 bankruptcy is $335, court fees (which vary by state), and attorney fees (the national average for Chapter 7 bankruptcy is $1,250, according to the National Bankruptcy Forum). You must pay the $335 bankruptcy petition when it is filed unless the court grants you an exception. In general, you should expect to pay about $1,500 with a simple case if you use a bankruptcy lawyer.
Exception 1: Paying the fee in installments
If you get approval to pay in installments, you will pay the court or the Bankruptcy Clerk’s office. The payment to the Bankruptcy Clerk’s Office must be in the form of a money order or cashier’s check for the exact amount. They do not accept cash.
You get an automatic stay from creditors without paying the entire fee. Making installments is beneficial if wage garnishment is involved. You must pay all installments within 120 days after filing. Failure to pay the full filing fee will result in the dismissal of your bankruptcy case.
If you plan to request an installment plan, follow these steps before filing:
- Fill out the application to pay the filing fee in installments.
- Please find out the total amount your specific bankruptcy district charges as a down payment as it can vary per district but counts toward the full fee.
Exception 2: Asking for a fee waiver
You will need to complete Official Form 103B, Application to Have the Chapter 7 Filing Fee Waived. You must show the court that you can’t afford to pay the fee.
Your annual income must be below 150% of the federal poverty guideline and household income. In addition to the income limit on eligibility, you must also show the Court that you can’t pay the filing fee in installments over 120 days after your case has been filed to be granted a fee waiver.
There’s no guarantee that you’ll be approved even if you meet the eligibility requirements.
If you are not eligible for the filing-fee waiver, you can ask the bankruptcy court to pay the filing fee in up to four installments.
How long does Chapter 7 bankruptcy take?
A Chapter 7 discharge takes about four to six months to complete. However, a Chapter 7 bankruptcy will remain on your credit for seven to ten years.
Chapter 7 bankruptcy waiting period to get a conventional loan
Chapter 7 must be dismissed or discharged for four years before applying for a conventional loan. There are, however, some loan options for people who have declared bankruptcy. But their interest rates will be high.
How long do you have to wait between Chapter 7 bankruptcies?
You must wait eight years from the filing date of your previous petition. The eight years start counting from the date you filed the previous Chapter 7 bankruptcy. If you file before those eight years have expired, you will not be granted a discharge.
What types of debt can be erased?
Chapter 7 bankruptcy can discharge the following unsecured debts:
- Credit card debt
- Medical bills
- Car loans
- Personal loans and payday loans
- Judgments from credit cards and debt collection agencies
- Utility bills
These debts are known as dischargeable debts.
What types of debt can’t be erased?
Exemptions that typically cannot be sold to pay creditors in Chapter 7 bankruptcy include
- Child support and alimony
- Recent tax debts and other debts you owe the government, like fines
- Most student loans
- Court fees
- Debts resulting from personal injury or wrongful death damages from drunk driving cases
- Debts that were non-dischargeable in a prior bankruptcy
- Debts owed to specific pension plans
- Certain debts owed for condominium dues and fees
- Debts not dischargeable in a previous bankruptcy because of the debtor’s fraud
- Debts from fraud, willful and malicious acts, embezzlement, theft, or breach of fiduciary duty
- Certain debts for luxury goods or services bought 90 days before filing
- Certain cash advances have taken within 70 days after filing
These debts are known as non-dischargeable debts.
You will still be required to complete and submit all tax returns during your bankruptcy case.
Chapter 7 bankruptcy considerations
If considering chapter 7, here are some things to keep in mind:
- The filer must be an individual or business.
- You must pass a means test.
- According to the U.S. Courts website, you “cannot file under chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.”
Chapter 7 bankruptcy is usually the quickest, easiest, and cheapest chapter of bankruptcy to file.
What is a means test?
The filer will have to undergo a means test. The Chapter 7 means test determines whether allowing someone to discharge their debts would be permitted under the bankruptcy system. The gross income period is based on the last six full calendar months before that day you file for bankruptcy. If your income falls below the median income for your state, you pass the means test.
Income received from Social Security payments, SSDI, and SSI is not included as income for the Chapter 7 Means Test. You do NOT have to report money received when or after your bankruptcy is filed.
Income used includes:
- Wages and salaries
- Net income from self-employment or operation of a business
- Net income from rental property
- Unemployment income
- Workers’ compensation income
- Interest, royalties, and dividends
- Annuities, retirement income, and pensions
- Child support or spousal support
- Another person contributes regular income for household expenses, such as money from a roommate, domestic partner, parent, or friend.
Calculate median income
The means test is calculated by comparing the debtor’s average annualized income for the past six months to the household’s median income in the filers’ state of residence.
If your income for six months is $36,000, for a family of four, your current monthly income equals $6,000 ($36,000 divided by 6). 12 months would be $72,000, and in Texas, the median income for a family of four is $89,196. You are eligible, providing you meet the other requirements.
There are a few exemptions from the means test. These depend on whether the debts are business debt and if you are at least a 30% disabled veteran. You could be exempt if you are or have been a member of the active-duty/ homeland defense exemption, with the statute of limitations for filing.
If you don’t qualify for Chapter 7 under the median income test, you may be eligible for Chapter 7 under the disposable income test.
- Disposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. Other deductions include:
- Food, clothing, and household expenses
- Vehicle and housing payments
- Out-of-pocket health care costs
- Childcare costs and school expenses
- Public transportation costs
- Child support or alimony payments
- Some insurance premiums
- Required payroll deductions
- Retirement savings
These expenses are based on the number of people that live in your home.
Are you thinking about filing for Chapter 7 bankruptcy? Check out this video for a step-by-step breakdown:
Chapter 7 bankruptcy for business
Chapter 7 bankruptcy for a business liquidates the company’s assets and “all operations and goes completely out of business.” A bankruptcy trustee takes over the business’s remaining assets, including liquidating all properties and assets to pay off debt.
Other types of bankruptcy
The other common type of personal bankruptcy filing is Chapter 13. Chapter 11 is the most common filing option when a business is involved.
Chapter 13 bankruptcy basics
Chapter 13 is the wage-earner’s plan. Chapter 13 allows individuals to pay off lenders with a 3-5-year monthly payment plan depending on their steady income. In Chapter 13 bankruptcy, you must devote your disposable income to your repayment plan.
Chapter 13 can protect the debtors’ homes from foreclosure.
In a Chapter 13 bankruptcy, the unsecured debts should be less than $394,725, and secured debts are less than $1,184,200.9
Like Chapter 7 bankruptcy, you can’t file for Chapter 13 bankruptcy if you had a bankruptcy petition dismissed due to their failure to appear before the court or comply with court orders within 180 days before the petition.
Lastly, you should have completed a credit counseling certificate from an approved agency within 180 days of filing.
Chapter 11 bankruptcy basics
Chapter 11 can be done by almost any individual or business, with no specific debt-level limits and no required income. Typically, it takes three to five years to carry out a Chapter 11 plan for a small business filer.
The debtor still has control of the company, has a reorganization plan, and creditors can vote to approve the program or not. He must also file several other documents, such as:
- Company assets and liabilities.
- Income and expenses.
- All executable contracts and unexpired leases.
- A statement of all financial affairs
Areas where bankruptcy won’t help
It won’t discharge:
- Most federal student loans
- Alimony and child support
- Debts you’ve incurred in the six months before filing bankruptcy
- Certain taxes
When you declare bankruptcy, your co-signer may still be legally obligated to pay all or part of your loan.
Considering bankruptcy? Here are the next steps
Bankruptcy can be a difficult time for anyone. Educate yourself before determining if bankruptcy is right for you.
- Know the different types of bankruptcy chapters.
- Consult a bankruptcy attorney who can advise you on your best course of action. Bankruptcy law is complicated so it’s best to get some expert guidance.
- Make sure you know what will happen to your home if you file. You can usually keep it, but it’s not guaranteed.
- Consider the Chapter 7 bankruptcy costs. A bankruptcy lawyer will charge about $1,000 to $1,500 for a Chapter 7 case.
- Consider other debt-relief options, including a debt consolidation company or taking a loan from your savings or retirement plan.
- Talk to a nonprofit credit counselor to discuss your options.
- Call credit card companies and try to settle debt amounts.
- Prepare for a massive hit from all three major credit bureaus.
- Be aware that it will affect your credit score for up to 10 years.
The bottom line
Whether you should file for Chapter 7 bankruptcy depends on your financial situation and what other debt-relief options are available to you. Be sure to consider the timing of our filing since you could be liable for large debt six months before a filing.
Taking a credit counseling course or getting a free evaluation from a bankruptcy attorney are great starting places to learn more about your options.
In almost 99% of individual bankruptcy cases, the trustee closes the case without selling anything that belonged to the debtor.
The non-exempt property includes homes not your primary residence, “boy’s toys” such as expensive cars and jet skis, musical instruments unless needed for work, family heirlooms, jewelry with resale value, and investments other than retirement accounts.
If you have a personal injury payout that’s less than $30,000, you can protect it under the Chapter 7 series set of exemptions and can double if both spouses are plaintiffs. Each state will have differing exemption amounts.
In a sole proprietorship, you and your business are considered the same and are equally liable for any debts that the company may incur.
If you have an LLC or Corporation, you and your business are separate legal entities. You can’t be held personally liable if your business can’t pay its debts, as long as the expenditure is business-related.
A Chapter 7 bankruptcy can stay on your credit report for up to 10 years from when you filed the bankruptcy.
Chapter 7 bankruptcy will not prevent a foreclosure on your home. But, once you file for bankruptcy, the court will order an automatic stay, which will put a hold on the foreclosure while the bankruptcy case is pending. However, the lender may ask the judge to allow the foreclosure to proceed. Or, the lender may wait to foreclose until the bankruptcy case is over.
If you want to keep your home, you need to keep making your payments before, during, and after bankruptcy. To avoid foreclosure, you must make up any already-missed payments and keep your payments current. When you sign the closing documents to borrow money to buy your home gives the lender the right to foreclose if you stop making payments on your mortgage.