Filing for bankruptcy offer a fresh financial start once you’ve exhausted all your other options for finding debt relief. It allows you to discharge most of your existing debts, so you can move forward free of the financial burden. This page can tell you everything you need to know about filing for Chapter 7 bankruptcy.
- What is Chapter 7 bankruptcy?
- How does Chapter 7 work?
- How long does Chapter 7 take?
- Chapter 7 vs Chapter 13
- How to qualify for bankruptcy Chapter 7
- Nondischargeable debt – what you’ll have after you file
- What is exempt in Chapter 7?
- How to rebuild credit after Chapter 7
- Filing for Chapter 7 again
- Do I need an attorney to file Chapter 7?
What is Chapter 7 bankruptcy?
Chapter 7 is one of two types of personal bankruptcy filings. It’s also called “liquidation bankruptcy” because the court liquidates (sells) your assets to pay off your lenders and creditors. This allows you to complete your filing quickly, so you can get a fresh start faster. Once the court liquidates your assets and pays the proceeds to everyone you owe, the court discharges any remaining balances.
How does Chapter 7 work?
- First, you must complete mandatory pre-bankruptcy credit counseling within 180 days of when you want to file.
- Once you receive your certificate, you can proceed to file. You must provide:
- Your credit counseling completion certificate
- A schedule of assets and liabilities – i.e. what you own and what you owe
- A schedule of income and expenditures – i.e. what you make versus what you spend
- A statement of financial affairs – a report of any lawsuits, repossessions, foreclosures and property liens
- A schedule of executory contracts and unexpired leases – basically, any contract agreement you have that hasn’t been completed
- After the court receives all the documentation required, they assign a trustee whom you will meet within 15-20 days.
- You will be subject to a means test to verify that you are eligible for Chapter 7.
- At the same time, the trustee issues an “automatic stay” on all your financial accounts. This stay:
- Prevents collection actions on any of your debts
- Stops any current foreclosure actions
- Freezes pending civil lawsuits, such as collection suits
- Your creditors then have the opportunity to object to discharge if they can prove you committed fraud.
- Once the trustee addresses all objections, you receive your official final discharge.
How to qualify for bankruptcy Chapter 7
The Bankruptcy Abuse and Consumer Protection Act of 2005 added a “means test” to the personal bankruptcy filing process. This test allows your court-appointed trustee to review your financial history and make sure your filing is legitimate. This ensures you qualify for Chapter 7 and can move forward with your filing. It also allows the trustee to see if you tried to game the system before your filing.
This may sound scary, but if you legitimately having trouble then you shouldn’t have anything to worry about. The only cause for concern happens if you don’t really need to file and you’re just looking for an “easy way out.” There can also be issues if you ran up a large volume of debt just before you filed. This is usually taken as a sign of fraud. Even so, you may still be able to file if you can prove your case.
The first part of the means test involves a median income assessment. The trustee compares your income earned over the past 6 months to the median income in your state. They basically compare your income to the Federal Poverty Line for your state.
Then they look at your financial history to see what you owe and what obligations you pay each month. The idea is to make sure that you really need bankruptcy, and specifically need Chapter 7. If you can afford a repayment plan, the court may adjust your filing to Chapter 13. High income earners are typically under more scrutiny.
In addition to passing the means test, the other requirement for filing is pre-bankruptcy credit counseling. This is simply a credit counseling session that lasts 60 to 90 minutes. You can complete the session in person, over the phone or online. There’s usually a fee between $20-$40.
How long does Chapter 7 take?
The standard timeline for a Chapter 7 filing takes between four to six months to complete.
Keep in mind that you must complete the pre-bankruptcy credit counseling session first. Your certificated must be dated within 180 days of the date you file. So, once you receive certification, you have about 6 months to file.
Following that, first important time marker is the time it takes your trustee to contact you. From the time you file, you can expect contact within about 15-20 days once they review your case. Then, following that initial contact, the remaining process takes about 60-120 days for the trustee to do their work. The time varies based on the complexity of your case and how many creditors file discharged objections. If you have a large number of objections, your case could take longer.
Still, the average person can expect to have a Chapter 7 filing completed within six months. This is much shorter than the time a Chapter 13 filing takes.
Chapter 7 vs Chapter 13
If you’re not sure which type of filing you should use, here’s a quick comparison:
|Chapter 7||Chapter 13|
|Commonly called:||Liquidation bankruptcy||Wage earner bankruptcy|
|How it settles your debts:||Sells your assets for lump-sum payoff||Sets up a monthly repayment plan|
|How long it takes:||About 4-6 months||Up to 5 years, depending on your repayment plan|
|What’s the credit damage||10 years from the date of discharge||7 years from the date of discharge|
Nondischargeable debt – what you’ll have after you file
No matter which type of filing you choose, there are certain debts that cannot be discharged through bankruptcy. For some other debts, you must be able to prove that not discharging the debt would create extreme financial hardship. Basically, you must be able to show that you’d be right back in bankruptcy court if they don’t discharge that debt.
Here is a list of debts that don’t typically qualify for discharge:
- Alimony and spousal support
- Child support
- Student loan debt (both federal and private)
- Debts to government agencies for fines and penalties, such as court costs
- Civil lawsuit debts for injury to another person
- Tax debt
Things like alimony and child support never qualify for discharge. If you can’t afford the payments even after your final discharge, then you must seek modification. In other words, you can modify your monthly obligation moving forward, but you can’t change what you already owe.
The government is also not fond of letting you off the hook for any debts that they’ve ordered you to pay. So, tax debt, court fines and civil penalties they’ve already assigned to you can’t be easily discharged either.
Then there’s the matter of student loans. Federal loans are government-backed debts, so it makes at least some sense that you can’t discharge them. But what about private debt? Well, loan servicers lobbied to ensure that the student debt exemption extended to their loans as well. Basically, the argument was that if you have to repay a federal lender, you should also have to repay private lenders, too.
That being said, it is possible to discharge student loan debt during bankruptcy in extreme cases of hardship. Expect a fight and hire a good bankruptcy attorney if you want to take this path.
What is exempt in Chapter 7?
Bankruptcy exemptions vary from state to state, although there are also federal exemptions. Exemptions allow you to keep certain property so that you’re not destitute after final discharge.
By federal law, none of the following possessions are ever liquidated during Chapter 7:
- Clothes, household goods and personal possessions – like musical instruments – up to $600 per item and up to $12,625 total
- Jewelry up to $1,600 total
- Work equipment and tools of the trade up to $2,375 in value
- Pets (and crops, if you have crops)
- A motor vehicle up to $3,775 in total value
- Health aids and medical equipment
- IRAs and Roth IRAs up to $1,283,025
- All tax-exempt retirement accounts, including 401(k) and 403(b) plans, as well as defined benefit pension plans
- Any federal benefits that you receive, such as Social Security, Unemployment or Veterans benefits
- Recovery money, such as wrongful death recovery and personal injury recovery and lost earnings payments
- Real property up to $23,675 in value or unused homestead exemption up to $23,675 in equity
All the values listed double if you are married and filing for bankruptcy jointly. So, instead of $1,600 in jewelry, you can keep up to $3,200. That also includes the homestead exemption, so if you’re married the exemption jumps up to $47,350.
Keep in mind that many states allow for higher exemptions. So, depending on where you live sometimes the exemption can go as high as $150,000 for married couples. That means that in many cases, you may be able to save your home from liquidation even though you filed for Chapter 7.
How to rebuild credit after Chapter 7
A Chapter 7 filing creates a negative item in your credit that remains for 10 years from the date of final discharge. However, this doesn’t mean that you will have to wait around for a decade before your credit recovers.
In the U.S. credit system, the “weight” of negative items diminishes over time. So, for instance, a late payment made last month hurts your credit much worse than one made five years ago. This means that the further you get away from final discharge of your bankruptcy, the less it hurts your credit.
You can basically start taking steps to rebuild your credit starting the day after your final discharge. With your fresh financial start, you also want to include a concerted effort to become creditworthy faster. Here are some tips to help you get started:
- Get a secured credit card or a small personal loan so you can start building a positive payment history.
- Gradually add new accounts, making sure not to take on too much new debt at once; adding debt to quickly is bad for your budget AND credit score.
- Make sure to keep your credit utilization ratio at less than 10%. That means that you only use ten percent or less of your available credit line.
- Once your score starts to improve after about six months, consider other “good” debt, such as an auto loan.
This strategy can pull you out of subprime credit in as little as a year, depending on your history and overall score.
Filing for Chapter 7 again
If you have already filed for Chapter 7 bankruptcy once and then get back into trouble, you can file again. However, while you can file as often as you want, there’s a time window on discharge. Basically, you won’t be eligible for another round of discharge until a certain amount of time has passed.
The clock always runs from the date of your first filing:
- If you filed for Chapter 7 before and want to file for Chapter 7 again, you must wait 8 years
- The window is only 4 years if you filed Chapter 7 before and now want to file Chapter 13
- If your first filing was Chapter 13 and now you want to file for Chapter 7, the gap is 6 years. However, if you paid back all your unsecured debt in-full or paid at least 70 percent, you may be able to file sooner.
Do I need an attorney to file Chapter 7?
By law, you don’t. Just like with Chapter 13 filings, you can file for Chapter 7 “pro se” (Latin for “for oneself”). However, the U.S. courts website actually states, “While individuals can file a bankruptcy case without an attorney or “pro se,” it is extremely difficult to do it successfully.”
So, basically even the courts say that you’re crazy to do this on your own unless you’re a bankruptcy attorney. And always keep in mind that an attorney may have more success. They’re more experienced at fighting discharge objections. They can also argue for extreme hardship on student loans.
That’s why it’s always recommended to work with a professional when it comes to bankruptcy.