What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy releases or “discharges” individual debtors from having to pay certain outstanding debts while allowing them to keep exempt assets so they can get on with their lives. It has strict eligibility criteria and only certain types of debts can be discharged. The main purpose of Chapter 7 is to provide a “fresh start” to individuals who really need it. Once debts are discharged, the debtor no longer has any liability for them and the creditor cannot pursue a debtor any further. Receiving a discharge under Chapter 7 is not an option for corporations or partnerships, only individuals (or married couples) can receive a discharge.
Who Is Eligible for Chapter 7?
Individual debtors can qualify for Chapter 7 relief. As an individual, you must first pass a Means Test. You must also receive credit counseling within 180 days before you can file and you must not have had a dismissed petition within the last half year. Partnerships, corporations, and other business entities may qualify for certain kinds of relief under Chapter 7, but not necessarily a discharge (speak with a bankruptcy lawyer for more information).
What Is a Means Test?
Means testing helps determine who honestly needs Chapter 7 relief. If you apply but don’t qualify, it’s considered an abuse of the bankruptcy protection laws. The test determines if your income is lower than the median level for your state, meaning you probably can’t pay back your consumer debts. See this website for more information.
What Is Credit Counseling?
Within 180 days before filing Chapter 7, debtors must meet with a government-approved credit counseling agency to discuss bankruptcy alternatives and possibly take actions to avoid bankruptcy. This credit counseling should be free, or almost free. Organizations will work confidentially to find solutions to repaying your debt, usually through a strict personal budget and money-management plan. More details about approved state agencies can be found at www.usdoj.gov/ust.
What Is Chapter 7 Dismissal?
Bankruptcy dismissal occurs when something goes wrong with your case and a court rejects it. There are many reasons this can happen and many consequences. Often you’ll be required to file under Chapter 13 instead. See elsewhere on this website for more details.
How Does Chapter 7 Work?
Once you know you’re eligible for Chapter 7, the first step is to file a petition with the local Federal bankruptcy court. In addition to your petition, there are a number of other forms you must file, and several actions that you or your lawyer must take. There are also fees associated with filing the case.
After you have filed, you are granted an “automatic stay”, which means most collection agencies can no longer take action against you. About a month later, your bankruptcy court case trustee will meet with you and your creditors to discuss the financial situation, and depending on your answers and pre-qualification tests and materials, the case will either be accepted or dismissed.
The trustee will also ensure you’re aware of the consequences of seeking a discharge, such as how it affects your credit. Your case might also be converted to another chapter to offer you additional debt relief. For debts to be discharged, you will be expected to fulfill certain duties.
What Are the Procedures and How Much Paperwork Is There?
The procedures involved for Chapter 7 filing are numerous. Getting help from a lawyer is usually considered necessary. In addition to steps already mentioned, you must also submit to the court or trustee these documents:
- Schedules of assets and liabilities
- A schedule of current income and expenditures
- A detailed statement of financial affairs
- A schedule of executed contracts and unexpired leases
- Copies of your most recent tax returns and returns filed during your case
Submit, if you are a debtor with chiefly consumer debts:
- A certificate of credit counseling
- A copy of any debt repayment plan developed through counseling
- Evidence of payment in the last two months from employers
- A statement of monthly net income and any anticipated changes
- A record of any interest in federal or state education or tuition accounts
To complete all the official forms, you must have:
- A list of all creditors and the amount and nature of their claims
- Detailed information regarding your income: its source, amount, and frequency
- A list of all your property
- A detailed, item-by-item list all your monthly living expenses
Do I Need a Lawyer to File Chapter 7?
While you are legally permitted to represent yourself, having a lawyer is highly recommended. A lawyer will handle most of the details concerning your case and is liable for any mistakes he or she makes, which takes the burden of responsibility off your shoulders.
What Fees Must I Pay?
A $245 case filing fee
A $39 miscellaneous administrative fee
A $15 trustee surcharge
Your lawyer’s fees
Can These Fees Be Waived or Paid in Installments?
Yes, the court may waive your fees if you live significantly below the poverty level and simply can’t pay them. Both the courts and most lawyers accept payments in installment plans.
What Are Exemptions in Chapter 7?
Your creditors have the right to liquidate many of your assets to pay off debts, but often you’ll be able to keep certain property, such as your house, cars, and needed household items. Together with the schedules you are required to file with the court, you’ll need to file a list of these exemptions. The law states certain property is protected from creditors; however, you should consult an attorney to determine the details in your state.
How Will My Discharge Work?
Most of your debts will be discharged, meaning creditors will no longer come after you; however, some debts are not discharged, including debts for alimony and child support, certain taxes, debts for federal or state educational benefits and loans, and debts related to criminal conduct, such as death or personal injury related to a DUI. If any fraud is detected before or even after the discharge, it can be revoked. It’s recommended you talk to a lawyer for more information.
Will Filing Chapter 7 Hurt My Credit?
Yes. Your credit rating will be negatively affected for a period of ten years, but you’ll slowly be able to build it back up. There are financial institutions that will quickly begin working with you again, allowing to restore your credit as quickly as possible, provided you make every payment. If your bankruptcy was caused by issues such as injury or illness, you might be able to get creditors to consider this when they rate your credit.