Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” is the most common type of bankruptcy filing in the United States. It is designed to help people with low income and high debt get a fresh start. The vast majority of recent filers have successfully erased their debt. In a nutshell, a bankruptcy court will discharge most of your debts and you get to start life over with a clean slate.
If you are living under the shadow of debts you know you will never be able to pay back, the opportunity to start over is compelling. Filing for bankruptcy can be challenging, so you should know what you’re getting into before you start.
First, not everyone can file for chapter 7 bankruptcy. All filers must first pass a “means test.” The Court looks at your income to determine if you can afford to pay all or a portion of your debt. The income limits vary from state to state, but in general, if your current monthly income is less than your state’s median monthly income, you can discharge your debts with no payments. If your income is about the median income, you might still qualify, but you will need to submit to a more thorough examination of your income and expenses. If your income exceeds your state’s median income, but your expenses are also quite sizable, you may still be eligible. You should know ahead of time that if the court determines that your disposable income is high enough to pay some of your creditors, you may need to switch your case to a chapter 13 bankruptcy filing. In chapter 13, you work out a repayment plan to pay or partially pay your debts over five years.
Next, if you have passed the means test, there are other qualifications you must meet. You cannot have had debts discharged under a previous chapter 7 filing until eight years have passed. Bankruptcy courts do not allow “serial” filing to keep erasing your debts. If you have already begun a chapter 7 case in the last six months but failed to show up for or obey bankruptcy court proceedings or rulings, you could temporarily lose your eligibility to file another chapter 7 case.
It should come as little surprise that your actual filing will require a great deal of paperwork. There are a variety of forms to fill out and you should be prepared to submit recent tax returns, bank statements, and other proofs of income. You’ll need to list everybody that you owe money to, and how much you owe. You will also need to list any property and assets you own. You’ll have to make a thorough list of recurring monthly expenses. The bankruptcy court wants to understand everything there is to know about your financial situation and see the paperwork to prove it.
After you have provided all the necessary background information, you will be appointed a trustee. The trustee will divide all your property and assets into two categories: exempt and non-exempt. The non-exempt will be sold, aka liquidated, and the proceeds will be distributed to your creditors as determined by the court. Some of your property may be designated exempt, though, and that you will get to keep. Exempt property is often the things you need to live – your home, your car, a computer, or other items necessary for you to maintain employment. If you have a retirement savings account, you might get to keep that, too. What if you have a mortgage or a car loan? You may be allowed to keep your home and vehicle and reaffirm, or carry over, the payments associated with them. Assuming you have sufficient income to continue paying for them, and the creditor agrees, you hold onto those items (and you keep paying for them). The purpose of filing chapter 7 bankruptcy is to give you a fresh start, so the court won’t to leave you homeless and unable to work.
Once you actually file, an “automatic stay” goes into effect. The automatic stay prohibits creditors from harassing you about repayment and prevents them from initiating any new debt collection actions such as repossessions, disconnections, evictions, and foreclosures. If you’ve been hounded by debt-collectors calling or barraged by threatening letters arriving in the mail, that will stop. (If it doesn’t, the creditor can face stiff penalties for continuing to pursue you.)
During this part of the process, which usually takes about 60 days, the bankruptcy court, the trustee, and any interested creditors have the opportunity to interview you about your finances. Throughout this stage (and every other stage), you are required to be honest, thorough, and accurate. The other parties involved are trying to get a precise and complete picture of your situation and your compliance is crucial. Every creditor has this window of time to question or raise objections to the upcoming discharge of their debt.
One common misconception about chapter 7 bankruptcy is that it automatically discharges all debts. There are several categories of debt that are rarely if ever erased; they will still be with you even if you go through chapter 7. If you owe money for alimony, child support, taxes, or student loans, you should assume you can’t get rid of those. And if you are in debt for restitution from crimes or injuries to people or property, those are also unlikely to be discharged. But money you owe to credit cards, medical providers, utilities, and the like, no matter how much, are almost certainly going to be erased.
Once you have gone through the filing process, the court will officially discharge your debts. From that point on, creditors are permanently prohibited from contacting you or trying to recoup money from you in any way. You will be free from lender and collection agency phone calls, letters, and law suits. From start to finish, the entire process takes approximately four months.
There will be other requirements and hurdles along the way and afterwards. Everyone who goes through chapter 7 bankruptcy is required to receive court-approved credit counseling. If you have a co-debtor – someone with whom you were in debt – he or she is still liable for at least some of what you owed together. A co-signer on a credit card or car loan, for example, is still responsible for payment. Your spouse will likely still have payment responsibilities as well, if you file for bankruptcy as an individual and he or she does not.
No one starts their adult life hoping to file for bankruptcy. Sometimes fate throws you a curve ball. A brief period of irresponsibility with credit cards while young can be a stone around your neck for decades. A car accident or other medical emergency can saddle you with enormous hospital bills. Even your own generosity – helping a friend or family member by co-signing on a loan that they then stop paying – can put you on the hook. A period of unemployment, loans to pay for college, a mortgage on a house that tanked in value through no fault of your own – there are dozens of ways people wind up in desperate financial straits. Bankruptcy law exists to help debtors find solutions to their money dilemmas.
Sometimes bankruptcy is the right answer, but it’s not a decision you will want to make on your own. The best way to find out if it’s the right choice for you is to consult with an experienced bankruptcy lawyer. At Holland Law Office, we specialize in finding you relief from your debts. Please call us at 970-283-7133 or click on Contact Us above to schedule a free debt consultation. Your debt-free future is waiting.