How Chapter 7 Bankruptcy Works: 5 Things to Know

Chapter 7 Bankruptcy

You may be exploring Chapter 7 bankruptcy due to a financial hardship. You may be wondering what happens when you declare bankruptcy or whether you can file bankruptcy on medical bills. The purpose of this article is to provide a comprehensive look at a Chapter 7 bankruptcy. Chapter 7 is the most common form of consumer bankruptcy.

A Chapter 7 bankruptcy is known as the “liquidation” chapter of bankruptcy. There may be a liquidation event if you have non-exempt property. Does this happen very often? Potentially not because there are other debt relief options. It’s important to realize that Chapter 7 bankruptcy can vary slightly from state to state. For instance, a Chapter 7 bankruptcy in Nebraska can look different from a Chapter 7 bankruptcy in Oregon. Make sure you are aware of the differences your state may have when considering a Chapter 7 bankruptcy. Let’s take a closer look at what a Chapter 7 bankruptcy is.

How Does a Chapter 7 Bankruptcy Work?

Chapter 7 bankruptcy is one of the quicker types of debt relief. While a Chapter 13 bankruptcy involves the submission of a repayment arrangement, which is approximated via a Chapter 13 Bankruptcy Calculator, a Chapter 7 consists of consolidation and disposing of non-exempt assets to settle with creditors by the liquidation of the assets.

Nevertheless, the debtor can keep the exempt assets in line with the Bankruptcy Regulations. But still, progressing with a Chapter 7 bankruptcy may undoubtedly lead to loss of assets.

How to Qualify for Chapter 7 Bankruptcy

To qualify for a Chapter 7 bankruptcy, you may be required to pass the means test. The means testing considers your income, the state you live in, and the household size. Here is the median income by state requirements for cases filed on or after April 1, 2020. You may wish to learn more about specifics in your state. For example, if you are in Florida, you may search for Florida bankruptcy.

Some of the parties that can qualify for a Chapter 7 bankruptcy include partnerships, business enterprises, corporate firms, and individuals

But there are two particular scenarios where people are not eligible for any kind of bankruptcy:

  1. If in the 180 days before filing for bankruptcy, the debtor did not seek verified credit counseling.    
  2. If in the 180 days before filing for bankruptcy, the individual’s bankruptcy petition was turned down because of non-compliance in several ways.

The Goal of Bankruptcy

The main objective of bankruptcy is to give debtors a fresh start through the discharge of their debts and withdrawing the responsibility of the debts. So, it goes without saying that Chapter 7 can only apply to individual people and not businesses or corporations.

Nevertheless, the debtor is not assured that the debt will be discharged because some specific kinds of debts, for instance, property debts cannot be discharged. Another debt that is rarely discharged is student loan debt.

Please note that a Chapter 7 bankruptcy will stay on your credit report for 10 years from the filing date.

Another thing to consider is whether you have received a Chapter 7 discharge in the last 8 years. In this case, you may be looking at Chapter 13 bankruptcy after a Chapter 7.

You may be wondering how to pass the means test for a Chapter 7, which is a valid question that we may explore at a later date.

The Chapter 7 Bankruptcy Procedure

The first stage when filing for Chapter 7 bankruptcy is filing a petition at the nearest bankruptcy court near the debtor’s residence or business premises. It is also a requirement to provide a few personal finance records/papers to the court, including financial statements and unexpired leases.

Also, there must be a copy of the debtor’s tax returns from the last year, plus all returns during the course of the case, given to the trustee assigned to the case.

Individuals in particular will need to file extra documents, including evidence of employer payment from two months before filing, copies of all debt repayment plans from credit counselors, and certificate of credit counseling.

Before a debtor can file, there are a few charges that should be paid to the bankruptcy court. As per the debtor’s ability to pay, the payments can be remitted in up to four installments, but there are exceptions to the limit. You may also be interested to file without an attorney. It may be easier to file a Chapter 7 bankruptcy without an attorney than a Chapter 13, but you may want to consider all of the different aspects before doing so.

When can a debtor confidently say that they have completed all Official Bankruptcy Forms? This is possible when they provide the information below:

  • A compilation of creditors, the amount owed, plus the nature of the claims;
  • The origin, amount, and the regularity of the debtor’s income;
  • A list of the debtor’s assets; and
  • A comprehensive list of the entire debtor’s monthly living expenditure, including clothing, shelter, food, transport, taxes, medicine, utilities, etc.

Additional things to consider

For married people, irrespective of which spouse is filing, there must be the other spouse’s details as well. The primary objective of doing so is for the bankruptcy court to be able to evaluate the financial state of the house accurately.

You are allowed to present a schedule of assets that are exempt in your case because the assets in question are decided and protected by state or federal bankruptcy laws. A reputable attorney in your state could provide state or federal bankruptcy exemptions. It’s important to remember that bankruptcy laws and exemptions can vary from state to state. So, if you’re filing for Chapter 7 bankruptcy in New Mexico, you’ll need to make sure you have state-specific information before filing.

You are advised to note a few things when filing for Chapter 7. The moment you submit, you will immediately stop some collection firms and creditors. After you have filed, a bankruptcy clerk will offer notice to the entire list of creditors you provided.

Meeting of Creditors

Also, in 21 to 40 days after filing, the case trustee will hold a meeting between the creditor and the debtor, who, in this case, will be under oath. In this meeting, the creditors and the trustee will have questions, and the debtor’s cooperation is vital. The debtor might be asked to present financial documents.

Among the reasons for this meeting is to make sure that the debtor understands the procedure of Chapter 7, the results, and the options. As long as you qualify, the bankruptcy Code permits you to convert your Chapter 7 case to Chapter 11, 12, or 13.

Knowing More about a Chapter 7 Discharge

Only debtors who file for Chapter 7 qualify for a Chapter 7 discharge. After a debt is granted a Chapter 7 discharge, you may be discharged from certain debts, and creditors are denied the power to take any steps towards the debt or to collect.

From information from the United States Courts, barring the exemptions, debtors get this discharge 99% of the cases. This commonly happens in two to three months after the initial sit-down with the creditors. The chances of not being granted a discharge are very slim.

Still, here we have a list of when such denials happen. Such reasons include defaulting in following the bankruptcy court’s instructions and failing to record enough financial transactions. But note that in some situations, even after a debtor is granted a discharge, creditors might still go after the underlying debts by confiscating property.

Things to consider

To stop this kind of action, a debtor should ‘reaffirm the debt.’ What are we saying here? We mean that the debtor has to agree to settle all or part of the debt owed to the creditors that, in other circumstances, it would have been waived through bankruptcy. As long as the debtor makes the payments, the assets cannot be seized.

Keep in mind that reaffirming must occur before the discharge being granted through a written agreement to the bankruptcy court. Some particular disclosures will be filed within the contract.

These disclosures include evidence that the debtor’s current earnings are enough to pay the debt and the amount of debt being reaffirmed. Without this kind of commitment, the court may refuse to acknowledge the reaffirmation agreement.

Nonetheless, if the debtor doesn’t have legal representation, the bankruptcy judge should approve the agreement. If a lawyer is present, they will have to establish that the reaffirmation will not harm the debtor. Above all, the debtor must not be coerced into paying the debts.

While the majority of debts are discharged via Chapter 7, in some cases, this is impossible. Such examples include debts from personal injury caused by driving while under the influence and debts accruing from educational loans. Some debts are sure to be discharged unless the creditor files to make the debts dischargeable.

When the trustee, (federal trustee in exceptional cases), or creditors request the court for discharge, in circumstances like fraudulent activity, the judge reserves the right to withdraw the discharge.

Finally, Chapter 7 is often the most affordable debt relief option, but that doesn’t mean you shouldn’t consider other options.

Conclusion

A Chapter 7 is a legal avenue of debt relief in the United States. To avoid bankruptcy, you may look at bankruptcy alternatives. Finally, you may wish to research all of your options including the pros and cons of a Chapter 7 bankruptcy before making the decision.

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