How Chapter 7 Bankruptcy Works
Whenever you file for a chapter 7 bankruptcy, the court will put a stay on all of your current debts. What this does is stop any creditors from garnishing your wages, turning off your utilities, evicting you, repossessing your property, foreclosing on your home, and stops them from collecting wages.
The job of the trustee is to review your assets and finances while overseeing your bankruptcy. The trustee will sell certain things that bankruptcy will not let you keep, which is called nonexempt property. The money from this gets used to repay your creditors. Trustees also deal with meetings between you and any creditors where you show up to a courthouse and answer questions about filing.
The property that you do not have to turn over to creditors or items you do not have to sell, which is called exempt property and the value of what you can claim as exempt, will vary based on the state where you are residing. Some states allow you to choose between federal exemptions and the state exemption list. However, Chapter 7 usually is a no-asset case, which means that either all of the property is exempt or there are valid liens on the property.
During the end of this process, around six months after you file for bankruptcy, the court will then discharge remaining debts, which means that you no longer need to pay them. Although, there are some types of debts that cannot get discharged during bankruptcy like student loans, tax debts, court fees, alimony, and child support.
The Differences Between Chapter 13 and Chapter 7 Bankruptcy
Chapter 13 and Chapter 7 are the most common types of bankruptcy, which affects a person. Either can help when you do not have the means to pay off your bills, but there are some significant differences between these types of bankruptcies.
Chapter 13 bankruptcy will allow you to keep all of your items and get a much more affordable repayment plan with all of your creditors. You will need to have enough income for you to afford to make the payments and be below the maximum total limits of your debts, which is $1 million or more for secured debts and $400,000 for unsecured debts.
The court will then approve a repayment plan for Chapter 13 bankruptcy. It is a payment plan that will last up for five years, and a trustee collects your money and distributes it to your creditors. Once the plan gets completed, the remaining unsecured debt will get paid off.
Who is Eligible for Chapter 7 bankruptcy?
If you want to apply for Chapter 7 bankruptcy, some conditions need to get met:
- The average monthly income for the first six months will need to be under the median income of a family of the same size in your state, or you must pass a means test to decide whether your disposable income can cover partial payments to creditors. If you fail the means test, you can still apply for Chapter 13 bankruptcy protection.
- In the past six years, you have not been able to apply for Chapter 13 bankruptcy protection.
- If you try to file a Chapter 7 or Chapter 13 bankruptcy petition and your case is dismissed, you must wait at least 181 days before you can try again.
- Generally, you must complete an individual or group credit counseling course from an approved credit counseling agency within 180 days before applying.
- You may be eligible to file a lawsuit, but if the court decides that you are trying to defraud creditors, the court may dismiss your case. For example, if you take out a loan or use a credit card, then declare bankruptcy to avoid repaying the debt.
- In the past eight years, you have not been able to apply for Chapter 7 bankruptcy protection.
What Debts Get Gorgiven in Chapter 7 Bankruptcy?
Chapter 7 bankruptcy usually releases your unsecured debts, such as credit card debt, medical expenses, and unsecured personal loans. At the end of the lawsuit, the court will usually clear these debts within four to six months after you start the lawsuit.
Certain types of unsecured debts do not usually get discharged through Chapter 7 bankruptcy, including:
- Unsecured debts that you intentionally did not mention during the filing
- Personal injury debts owed because of an accident caused by your intoxication
- Court penalties and fees
- Homeowners association fees
- Tax debts
- Student loans
- Child support
Your creditors can also object to and prevent specific debt relief. For example, a credit card company may object to the recent purchase of luxury goods or prepaid cash debts, and the court may decide that you still need to repay the credit card balance.
Besides, Chapter 7 bankruptcy may discharge your debts owed to the secured loan. A secured loan is secured by a mortgage, as in a home loan or the creditor has a property lien. However, even if the debt gets paid off, the creditor still has the right to cancel or recover your property.
How Long Does it Take to File for Chapter 7 Bankruptcy?
Usually, the entire Chapter 7 bankruptcy process starting from the first consultation of your credit to the court’s discharge of the remaining debts, is something that can take up to six months to finish.
However, your case may take longer, for example, when the trustee asks you to submit other documents, or whether they must sell your property to pay creditors. Or maybe you want to try to get your student loan discharged in bankruptcy. That is possible, but challenging, and may require a lengthy trial.
How Long Does Chapter 7 Bankruptcy Remain in your Credit Report?
Chapter 7 bankruptcy is a significant derogatory sign, and it may damage your credibility. From the filing date, Chapter 7 bankruptcy records can get retained on your credit report for up to 10 years, and from the filing date, a complete Chapter 13 bankruptcy can get retained on your credit report for seven years.
The accounts included in the bankruptcy may be deleted from your credit report earlier, as most negative signs will get deleted after seven years.
Life After Bankruptcy
Filing for bankruptcy can consume much energy financially, physically, and emotionally. However, this may be your best choice when bills continue to pile up, and you are unable to pay your creditors. You can also recover from bankruptcy and rebuild your finances and credit, but it will take time.