Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” allows individuals to discharge most of their unsecured debts. When you file for Chapter 7, a bankruptcy trustee sells your nonexempt property to pay off creditors. The process is relatively quick, typically taking about four to six months from start to finish.
By the end of the process, most of your debts will be discharged, giving you a fresh financial start. However, it’s important to understand the intricacies and consequences of filing for Chapter 7 bankruptcy before making a decision.
How Does Chapter 7 Bankruptcy Work?
When you file for Chapter 7 bankruptcy, the court issues an automatic stay, which temporarily halts most collection activities, including lawsuits, wage garnishments, and calls from creditors. A court-appointed trustee then takes over your case, reviews your assets and liabilities, and sells nonexempt property to pay your creditors.
Certain types of debts, such as child support, alimony, and most student loans, typically cannot be discharged. Once the trustee has liquidated your assets and paid off as many creditors as possible, the court will discharge your remaining eligible debts, giving you a clean slate.
IMPORTANT NOTE: If you have substantial equity in your home (20% or more), you may be able to avoid bankruptcy altogether by refinancing your mortgage with cash out.
If you’d like to explore this option, please reach out to Hannah Papazian at JVM Lending at hpapazian@jvmlending.com or call (855) 855-4491.
Who Qualifies for Chapter 7 Bankruptcy?
To qualify for Chapter 7 bankruptcy, you must pass a means test. This test compares your income to the median income for a similar household size in your state. If your income is below the median, you are eligible to file.
If your income is above the median, you may still qualify by passing a second part of the means test, which examines your disposable income after accounting for certain allowable expenses. Additionally, you must complete a credit counseling course from an approved agency within 180 days before filing.
How Do You File for Chapter 7 Bankruptcy?
Filing for Chapter 7 bankruptcy involves several steps. First, you must complete a credit counseling course. Next, you file a petition with the bankruptcy court, including schedules of your assets, liabilities, income, and expenses. You must also provide a statement of financial affairs and any existing contracts or leases.
After filing, you attend a meeting of creditors where the trustee and creditors can ask questions about your financial situation. Finally, you must complete a debtor education course before receiving a discharge of your debts.
How Much Does Chapter 7 Bankruptcy Cost?
Filing for Chapter 7 bankruptcy involves several costs. Here’s a breakdown of what the fees might look like, but they can vary by area:
Filing Fees:
- $245 case filing fee
- $75 miscellaneous administrative fee
- $15 trustee surcharge
- Total: $335
These fees can sometimes be paid in installments with court approval.
Attorney Fees:
- Vary depending on case complexity and location
- Typically range from $1,000 to $2,500
Fee Waiver:
- Some individuals may qualify for a fee waiver if their income is below 150% of the federal poverty level.
Understanding these costs is essential for anyone considering Chapter 7 bankruptcy. It’s advisable to consult with a bankruptcy attorney to get an accurate estimate based on your specific situation.
How Long Does Chapter 7 Bankruptcy Take?
The entire Chapter 7 bankruptcy process usually takes about four to six months from the time you file the petition to the time your debts are discharged. The initial phase, including filing and attending the meeting of creditors, typically occurs within the first few weeks. After that, there is a 60-day period during which creditors can object to the discharge of specific debts. Once this period expires, the court will issue a discharge order, provided you have completed the required debtor education course.
What Debts Are Discharged in Chapter 7 Bankruptcy?
Chapter 7 bankruptcy can discharge a variety of unsecured debts, offering relief to those struggling with financial burdens. Here’s a list of debts that are typically dischargeable:
Dischargeable Debts:
- Credit card debt
- Medical bills
- Personal loans
- Utility bills
- Payday loans
- Some civil court judgments (excluding those based on fraud)
- Certain past-due taxes (under specific conditions)
- Overdue rent payments
However, not all debts can be discharged in Chapter 7 bankruptcy. Here’s a list of debts that are generally non-dischargeable:
Non-Dischargeable Debts:
- Alimony
- Child support
- Certain tax obligations (such as recent income taxes)
- Student loans (unless you can prove undue hardship)
- Court fees and penalties
- Debts for personal injury caused by driving under the influence
- Secured debts (such as mortgages and car loans) unless the property is surrendered; otherwise, creditors can repossess or foreclose on the property if payments are not made
- Homeowners association (HOA) fees if you keep the property
Understanding which debts can and cannot be discharged is crucial for anyone considering Chapter 7 bankruptcy. It’s often beneficial to consult with a bankruptcy attorney to get a clear picture of how your specific debts will be handled.
Why Are Income Guidelines Important for Chapter 7 Bankruptcy?
Understanding the income guidelines for Chapter 7 bankruptcy is crucial because it determines whether you are eligible to file. These guidelines are designed to ensure that Chapter 7 is reserved for individuals who genuinely need relief from overwhelming debt and lack the means to repay their creditors.
Income Guidelines for Chapter 7 Bankruptcy
The income guidelines for Chapter 7 bankruptcy are determined by the means test, which involves two main steps:
Median Income Comparison:
- The means test compares your average monthly income over the past six months to the median income for a household of your size in your state.
- If your income is below the state median, you automatically qualify for Chapter 7 bankruptcy.
Disposable Income Assessment:
- If your income is above the median, you must pass the second part of the means test.
- This assessment evaluates your disposable income after deducting allowable expenses such as living costs, taxes, and secured debt payments.
- If your disposable income is too high, indicating that you can afford to repay a portion of your debts, you may need to consider filing for Chapter 13 bankruptcy instead.
Understanding these income guidelines helps ensure that Chapter 7 bankruptcy is used appropriately and that those who file genuinely need the relief it offers. Consulting with a bankruptcy attorney can help you navigate the means test and determine the best course of action for your financial situation.
Pros & Cons of Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy offers several benefits that can help individuals regain financial stability. Here are the main advantages:
Pros:
- Fresh Start: Discharges most unsecured debts, providing a clean financial slate.
- Quick Process: Typically completed within four to six months, allowing for a swift resolution.
- Automatic Stay: Immediately stops most collection actions, including lawsuits, wage garnishments, and harassing phone calls from creditors.
Cons:
- Loss of Nonexempt Property: Nonexempt assets may be sold to pay off creditors.
- Credit Impact: Can negatively affect your credit for up to 10 years.
- Non-Dischargeable Debts: Certain debts, such as student loans, alimony, and child support, cannot be discharged.
Understanding both the advantages and disadvantages of Chapter 7 bankruptcy is essential for making an informed decision about your financial future. Consulting with a bankruptcy attorney can provide further insight into how these factors apply to your specific situation.
Alternatives to Chapter 7 Bankruptcy
Before deciding to file for Chapter 7 bankruptcy, consider other options that may help you manage your debts. These alternatives include:
- Debt settlement: Negotiating with creditors to reduce the total amount you owe in exchange for a lump-sum payment.
- Debt management plans: Working with a credit counseling agency to create a plan to pay off your debts over time with reduced interest rates.
- Debt consolidation loans: Taking out a loan to pay off multiple debts, resulting in a single monthly payment.
- Credit counseling: Seeking advice from a nonprofit credit counseling agency to explore options for managing your debt without filing for bankruptcy.
- Negotiating directly with creditors: Contacting your creditors to discuss alternative payment arrangements, such as reduced payments or extended payment terms.
- Cash Out Mortgage: Borrowers with a job and substantial equity in their homes are sometimes able to avoid bankruptcy entirely by refinancing into a new cash out mortgage that provides enough cash to pay off all of their debts. FHA lending guidelines are more flexible than most borrowers realize and, as a result, many borrowers who could otherwise avoid bankruptcy, miss the opportunity to refinance.
Frequently Asked Questions
What is a Chapter 7 bankruptcy trustee?
A Chapter 7 bankruptcy trustee is an impartial individual appointed by the court to oversee your bankruptcy case. The trustee’s responsibilities include reviewing your bankruptcy petition, examining your financial records, conducting the meeting of creditors, and liquidating your nonexempt assets to pay off creditors. The trustee also ensures that you comply with the bankruptcy code and may challenge any attempts to hide assets or commit fraud.
What is exempt vs. nonexempt property in Chapter 7?
Exempt property refers to assets that you are allowed to keep during a Chapter 7 bankruptcy, up to a certain value. These exemptions vary by state but generally include a portion of the equity in your home (homestead exemption), your vehicle, household items, and certain personal property. Nonexempt property, on the other hand, includes assets that exceed these exemption limits and can be sold by the trustee to pay creditors. Examples of nonexempt property might include valuable collections, high-end electronics, and second homes.
Can I file for Chapter 7 bankruptcy online?
While you can access many of the forms and resources needed to file for Chapter 7 bankruptcy online, the actual filing process requires submitting documents to the bankruptcy court in person or by mail. Some courts may offer electronic filing for attorneys, but individuals filing pro se (without an attorney) typically need to submit paper documents. NOTE: It is highly recommended to consult with an attorney or seek assistance from a legal aid organization to ensure that your filing is accurate and complete – contact us for a referral to a bankruptcy attorney.
What’s the difference between Chapter 7 and Chapter 13 bankruptcy?
While both Chapter 7 and Chapter 13 bankruptcy provide debt relief, they operate differently:
- Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, Chapter 7 involves selling your non-exempt assets to pay off as much debt as possible. The remaining dischargeable debt is wiped out, usually within a few months.
- Chapter 13 Bankruptcy: This is a reorganization bankruptcy that allows you to keep your property and pay back your debts over time through a repayment plan. It is typically for individuals with a regular income who can afford to make monthly payments.
The Bottom Line
Bankruptcy can offer tremendous relief from the pressures of excess debt. Bankruptcy also comes with tremendous repercussions that can last for years. At JVM Lending, we specialize in helping borrowers avoid bankruptcy with cash-out refinances.
If you have substantial equity in your property and are considering bankruptcy, it might not be too late to refinance and avoid bankruptcy altogether. If you would like to see if you are eligible for a cash out refinance, please reach out to us.
