What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, sometimes referred to as a straight or liquidation bankruptcy, is a type of bankruptcy that involves liquidating most assets to pay off outstanding debts. It is the most common form of bankruptcy filed by individuals.
Overview of the Chapter 7 Bankruptcy Process
The Chapter 7 bankruptcy process generally involves:
-- Filing a bankruptcy petition with the bankruptcy court
- Appearing at a meeting of creditors
- Potentially turning over some assets to be sold by the bankruptcy trustee
- Receiving a discharge of many debts
Filing the Bankruptcy Petition
To file for Chapter 7 bankruptcy, the debtor files a bankruptcy petition along with various schedules disclosing their assets, liabilities, income and expenses. This is typically done with the assistance of a bankruptcy attorney.The filing of the petition automatically stops (stays) collection activities, foreclosures, wage garnishments, and most lawsuits against the debtor related to dischargeable debts. This provides immediate relief while the remainder of the bankruptcy process unfolds.
The Meeting of Creditors
Approximately 30-60 days after filing, the debtor must attend a meeting of creditors presided over by the bankruptcy trustee. Creditors rarely attend. However, the debtor must attend and answer questions under oath related to their bankruptcy forms and financial affairs. This meeting usually lasts less than 10 minutes.
Turning Over Assets to the Trustee
When a debtor files Chapter 7, all of their assets become part of their bankruptcy estate, overseen by the appointed bankruptcy trustee. However certain assets are exempt from liquidation based on federal or state exemption laws.For assets that are not exempt, the trustee can sell these assets and distribute the proceeds to creditors. Examples of non-exempt assets that may need to be turned over include: a second car, cash in bank accounts, and equity in non-homestead property.
Discharge of Debts
The primary benefit of filing Chapter 7 bankruptcy is the elimination (discharge) of many outstanding unsecured debts like credit cards, medical bills, personal loans, past-due utility bills and more. This provides the debtor with a financial fresh start.However certain debts cannot be discharged in Chapter 7 bankruptcy. These include student loans, recent taxes, alimony/child support, and debts arising from fraud or intentional harm.
-Who is Eligible to File Chapter 7 Bankruptcy?
To qualify for Chapter 7 bankruptcy relief, debtors must pass a means test showing they lack sufficient disposable income to repay a meaningful portion of debt. Specifically, they must fall below median state income levels based on family size. There are special rules for calculating income and expenses.Those above the median income can still potentially file Chapter 7 but must document special circumstances showing the inability to repay debts. Veterans, disabled individuals and elderly filers may have expanded Chapter 7 allowance as well.It is also generally required that debtors receive budget and credit counseling within 180 days prior to filing bankruptcy.
Pros and Cons of Filing Chapter 7 Bankruptcy
There are many advantages of filing Chapter 7 bankruptcy, but also downsides to consider:Pros
- Immediate automatic stay stopping collections
- Elimination of most unsecured debts
- Typically faster and less complicated than Chapter 13
- Debtor can keep exempt assets like home, car, retirement accounts
Cons
- Assets above exemption limits may be liquidated
- Negative impact on credit score for 7-10 years
- Future wages can be garnished for some debts
- Bankruptcy public record can impact employability
- Cannot file again for 8 years
How Much Does it Cost to File Chapter 7 Bankruptcy?
The cost of filing Chapter 7 bankruptcy varies by location and attorney experience, but often ranges from $1,200-$3,500+ when hiring a private bankruptcy lawyer. The attorney handles preparing and filing the bankruptcy paperwork in its entirety.Low income individuals below 150% of state poverty guidelines can request a fee waiver to file Chapter 7 without attorney fees. This requires filing pro se (without attorney representation).
How Long Does Chapter 7 Bankruptcy Take?
The Chapter 7 bankruptcy timeline typically spans 3-6 months from start to finish:
-- 1-3 Weeks Before Filing: Receive budget and credit counseling, collect paperwork.
- Filing Day: Attorney files bankruptcy petition, automatic stay goes into effect.
- 1-2 Months After Filing: Attend meeting of creditors.
- 2-4 Months After Filing: Trustee liquidates non-exempt assets if applicable.
- 90 Days+ After Filing: Receive bankruptcy discharge entering financial fresh start.
The COVID-19 pandemic has created significant backlogs in the bankruptcy courts. Timelines can take longer in some jurisdictions.
Finding a Bankruptcy Lawyer
Navigating the legal complexities of Chapter 7 bankruptcy requires working with an experienced bankruptcy attorney in most cases. When researching lawyers, debtors should:
- Check credentials: Ensure they are licensed in your state and focus specifically on consumer bankruptcy.
- Read reviews: Check Google, Avvo, BBB and other sites checking feedback from former clients.
- Compare fee options: Fees can vary widely when filing Chapter 7 bankruptcy.
- Meet for a consultation: Discuss your specific situation to decide if Chapter 7 is the best approach.
Using an attorney greatly simplifies filing Chapter 7 bankruptcy. They handle all documentation, communicate with creditors, represent at court hearings, and advise on correctly following legal processes.
-Chapter 7 Bankruptcy Alternatives
For those that do not qualify for Chapter 7 relief, or are looking to restructure debts over time rather than liquidating assets, there are alternatives to consider:Chapter 13 Bankruptcy: Allows debtors to keep assets but must repay some debts over 3-5 years based on disposable income.Debt Management Plans: Work with creditors to lower interest rates and create affordable repayment plans avoiding bankruptcy.Debt Settlement: Lump sum settlements are negotiated with creditors often saving 40-60% off balances owed.Debt Consolidation Loans: Combines debts into a single monthly payment, potentially with better rates and terms.Each approach has pros and cons to weigh based on personal financial situations. Speaking with a credit counselor or bankruptcy lawyer helps identify the most fitting debt relief option.
Overcoming the Stigma of Bankruptcy
For many, filing for bankruptcy protection remains an embarrassing last resort carrying a negative social stigma. However, by 2021 over 600,000 Americans annually were using Chapter 7 bankruptcy to take control of finances crippled by job loss, medical bills, divorce or other catastrophic events.Bankruptcy laws exist to provide a financial safety net and fresh start during times of crisis. Consumers ending up in untenable debt through no fault of their own should not be ashamed to pursue relief. With new financial discipline, many bankruptcy filers go on to rebuild credit scores and achieve post-bankruptcy success.
Conclusion: Who Should File Chapter 7 Bankruptcy?
Chapter 7 bankruptcy provides the benefit of eliminating eligible debt quickly, allowing consumers to restart their financial lives. It can be an appropriate strategy for low income individuals facing severe hardship from job loss, medical expenses or other crisis situations. High income filers may also use Chapter 7 bankruptcy if they lack disposable income for structured debt repayment plans.The best way to decide if Chapter 7 is the right debt relief solution is to consult with a bankruptcy attorney and credit counselor. They can review your unique circumstances and debts to be discharged before moving forward with bankruptcy proceedings.