Filing for Chapter 7 Bankruptcy
Liquidate your assets to hit the financial reset button.
If you have to file for bankruptcy, you might as well use the option that completely discharges your debts, right? Not always! Many people automatically assume a Chapter 7 bankruptcy filing is better than a Chapter 13 because it lets you discharge debts completely. In truth, this can be worse for your financial outlook, depending your situation.
Fact: About twice as many people file Chapter 7 as file Chapter 13 each year.
So it’s important to know that you’re choosing the right type of filing once you decide it’s time to file. You should also know what to expect with the Chapter 7 filing process so you can be prepared for what’s to come.
Two signs you need Chapter 7
Every financial situation is different, but you can basically take two signs as a clear indication you should file for Chapter 7.
- You have no major assets to speak of that need to be protected. You don’t own property with a lot of equity, any vehicles, stocks or investment accounts, etc. Basically, if the only things you own are clothes and personal possessions, you’re good for Chapter 7.
- You’re having trouble even affording basic necessities. If you’re struggling to buy groceries for your family and have to struggle to keep the lights on every month, you’re probably right for a Chapter 7 bankruptcy filing. If you’re just having trouble paying off your credit card debt, that usually doesn’t cut it.
Qualifying for Chapter 7
For any filing, you will be subject to a “means test” according to the laws set out by the BAPCPA in 2005. This means test allows a trustee to assess your financial history to make sure your filing is legitimate — in other words, that you aren’t just filing to avoid paying back your debts.
It may sound scary, but if you’re having real trouble, then you shouldn’t have anything to worry about. You only need to be concerned if you have a high income or you’re engaging in practices that will look shady when your debts are reviewed (like racking up a bunch of credit card debt just before you file). Even so, you may still be able to file successfully as long as you prove your case.
In addition to the means test you are also required by law to undergo a pre-filing session with a certified credit counselor. This allows an independent third party to assess your situation so they can determine if any options could help you avoid going through bankruptcy. If no alternatives are found, the process moves forward.
What to expect in the filing process
Chapter 7 is also called “straight bankruptcy” or “liquidation” because any assets are sold off to pay back at least a portion of your debts. After that, the remaining balances are discharged completely.
It’s actually the simplest and quickest type of bankruptcy filing, so you usually don’t have to worry about a long, drawn out process. In general, Chapter 7 filings can take as little as a few months to complete from start to finish – especially if the case is ruled as a “no asset” Chapter 7 filing.
First you must complete a mandatory pre-filing credit counseling session within 180 days BEFORE the date of your filing. A trustee gets assigned and performs the means test. Once you pass, you’re clear to proceed to a judgment. During these proceedings, you have an “automatic stay” on all of your financial accounts.
- Creditors are prevented from trying to collect on any debt
- Any pending foreclosure process is stopped
- Pending lawsuits are frozen
You typically will meet your trustee about 15-21 days after you initially file. You are required to list all of your debts, as well as to provide a detailed list of your income and monthly expenses. If your creditors do not object to the discharge of your debts (they can only do this if they can prove fraud) then you typically receive the official discharge about 60 days after the trustee meeting.
How long does Chapter 7 bankruptcy stay on your credit report?
a) 3 years
b) 5 years
c) 7 years
d) 10 years
The penalty is three years longer than the penalty for Chapter 13.
d) 10 years
Everything else you need to know
There are a few finer points to Chapter 7 bankruptcy that you should know about before you file:
- Part of the means test includes a median income assessment. If your yearly income is higher than the median (average) yearly income for your state, your case can be thrown out if you can’t prove extenuating circumstances.
- You can’t move somewhere to make Chapter 7 easier. While bankruptcy law varies from state to state, federal law prohibits debtors from filing for bankruptcy within two years of moving to a new state.
- Certain debts stay with you. Some debts and other obligations can’t be discharged, even with a Chapter 7 bankruptcy (see below).
- You might be able to save your car/home. If you are current on the monthly payments you may be able to prevent liquidation, but only if you are 100% current with your payments. If not, you may want to consider Chapter 13.
Here is a general list of the types of debt that cannot be forgiven during bankruptcy…
- Child support
- Alimony or spousal support
- Student loan debt
- Debts for willful, malicious injuries to other persons or property
- Debts to government agencies for fines or penalties
- Debts for injury (even personal injury) caused by operating a vehicle under the influence
- Debts owed to certain tax-advantaged retirement plans
- Debts for certain condominium or cooperative housing fees
- Tax debt