Chapter 7 Bankruptcy – Learn all you need to know about it

What Is a Chapter 7 Bankruptcy

Bankruptcy is the process by which a person can relieve himself of some or all of this debts under the guidelines laid down by the bankruptcy law.

Chapter 7 bankruptcy allows the discharging of debts after going through the process of liquidation of eligible assets.

The liquidation allows the borrower to pay back the creditor fully or partially, mostly partially. The assets that can be liquidated and those that are exempt is decided by the bankruptcy state law.

Any debt that remains after asset liquidation is discharged and the borrower can no longer be held legally liable or responsible to pay it.

The creditors or collectors will not have any rights to pursue recovery of the debts that have been discharged.

A chapter 7 bankruptcy will usually be discharged within 4 months of filing.

Information Needed to File a Chapter 7 Bankruptcy

The filing of a chapter 7 bankruptcy starts with the process of putting in required forms and information with your local bankruptcy court.

The information and the paperwork that you will usually have to provide during the time of filing is as follows:

  • A schedule of assets and liability which lists all your creditors and the nature of your debt claims.
  • A statement of current income and liabilities which must include your source of income, amount along with your monthly living expenses.
  • ‘A statement of financial affairs’ form will need to be filled out. This form will ask questions pertaining to your income over the past three years, debts you owe, repossessions, foreclosures etc.
  • A schedule of executory contracts and unexpired leases that you have not yet fulfilled.
  • You need to provide the court with a copy of your most recent tax return and any other returns you file while your bankruptcy case is still open.
  • If you have a lot of consumer debt as opposed to personal debt you will need to file a certificate of credit counselling completion from a government approved credit counselling agency along with a copy of any debt repayment plan that has been proposed by the agency.
  • It is mandatory to receive credit counselling from an approved credit counselling agency not later than 180 days prior to the bankruptcy filing.

What Happens After You File for Chapter 7 Bankruptcy

The first thing to happen after a chapter 7 filing is that a trustee is assigned to the bankruptcy case. The exception is if you live in Alabama or North Carolina where a member of the bankruptcy court fulfils the function of a trustee.

The job of the trustee is to review the assets and determine which ones are exempt and which ones are non-exempt. Non-exempt assets are absorbed by the state and sold to pay back the creditors that you owe.

Assets that are exempt cannot be taken by the state and remain under ownership and control of the debtor.

If the trustee funds that all your assets are exempt then he will file a “no asset” report with the bankruptcy court.

It is a fact that most chapter 7 bankruptcy cases are no asset cases.

In case your bankruptcy filing involves non-exempt assets your creditors are allowed to file a claim for the distribution. They are given 90 days after the first date set for the meeting of the creditors to file their claims. The government creditors will have 180 days to file their claim.

Usually between 20 to 40 days after filing for bankruptcy the first meeting of the creditors is held. The borrower who is filing is required to attend along with the trustee assigned to the case.

The creditors are allowed to ask the trustee and the consumer questions about finances and assets. If the bankruptcy has been filed jointly with a spouse then both of them need to be present at the meeting.

Chapter 7 Bankruptcy Means Test

The U.S. government has passed a law that is meant to test a consumer’s claim to a bankruptcy.

The means test is designed to prevent abuse of the bankruptcy system and ensure that the consumer is truly unable to pay off his current debt.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires this step.

If the current monthly income is less than the median income for a household of your size in your state, you pass. You do not need to complete the rest of the means test. You can file for Chapter 7.

If a person makes more than the state’s median income the calculations get complicated. The court will try to arrive at projected monthly income over the next 5 years. It is best to consult a bankruptcy attorney or an accountant who specialises in bankruptcy at this point.

If you fail the means test, the bankruptcy filing will either be rejected the court or given the option to be converted to a chapter 13 bankruptcy filing.

How to Qualify for Chapter 7 Bankruptcy

Chapter 7 bankruptcy is typically harder to file than a chapter 13 bankruptcy. Also a chapter 7 bankruptcy stays for a longer period of time on the credit report of the borrower.

There are a few conditions and tests that an individual needs to pass before he can qualify for filing. The following are the requirements for filing under chapter 7 bankruptcy.

  • Your income must qualify the means test.
  • A person can only file for a chapter 7 bankruptcy if the monthly income is below the state’s median income for the family of his/her size. The consumer is required to go through the means test if more than half of his debt is from consumer purchases rather than business, tax or tort debts.
  • You need to be an individual, married couple or a small business owner to qualify. You cannot file a chapter 7 bankruptcy on the behalf of a Corporation, LLC or a partnership.

You can file a chapter 7 bankruptcy if you are:

  1. An individual married and filing jointly with your spouse.
  2. A sole proprietor with personal liability on business debts.
  3. Half owner of a business partnership with someone other than your spouse and are filing bankruptcy on business debts that you have personal liability on.

How long does it take to discharge a chapter 7 bankruptcy

From the date the papers are first filed till the time that debts are discharged it takes usually takes about 4 months.

Discharge papers are automatically sent to all creditors letting them know that the debt has been discharged and that the creditors no longer have any legal right to try and collect the debt from the consumer any more.

A chapter 7 bankruptcy will remain on the credit report of the consumer for a period of 10 years and the person cannot file another chapter 7 bankruptcy for another eight years.

The same person will also not be able to file for a chapter 13 bankruptcy for another 4 to 6 years, the exact duration of which must come from your local court or a qualified attorney.

Costs of Filing for a Chapter 7 Bankruptcy

The filing for a chapter 7 bankruptcy costs a total of $309.

The breakup of this amount is as follows: The filing fee is $245, $39 for miscellaneous expenses and $25 for the trustee fee.

These are the official government fees and charges. If you choose to hire an attorney yourself it will be an entirely separate expense. The bankruptcy filing charges are supposed to be paid to the clerk of court when you file your bankruptcy paperwork.

It is possible to get the permission of the court to make the total payment in a maximum of four instalments.

In such a scenario the final payment is due no more than 120 days after you file. It is possible to get the bankruptcy fee waived altogether if you make less than 150% of the poverty level and you cannot afford to pay the fee at all even on instalments.

Not paying the bankruptcy fee when it is due will result in the bankruptcy filing being dismissed.

Choosing the Right Kind Of Bankruptcy Plan Between Chapter 7, 13 And Others

It is important that you choose the right bankruptcy plan to yourself. Since bankruptcy laws are completed it is best to consult a professional attorney who will guide you. He will be able to tell you about the advantages and disadvantages of choosing between a chapter 7 and a chapter 13 bankruptcy in your particular circumstances. Every situation is different and needs to be analyzed carefully before deciding which plan of bankruptcy filing to choose. These are the following a few points that person should keep in mind.

Filing for chapter 7 bankruptcy can result in losing and assets that you might want to keep such as your home.

Choosing a chapter 7 bankruptcy may help you discharge most of your unsecured debts and allow you to keep most of your assets.

You need to pass the means test to prove that your income is not higher than the median income for your state for your size of the family.

You can only file for a chapter 7 bankruptcy if you can pass the means test.

Chapter 13 bankruptcy will require you to build a repayment plan to pay off your creditors.

The repayment plan in chapter 13 bankruptcy will be executed through the court which means that you will make your payments to the court as per the repayment schedule.

The repayment schedule will begin even though the court has not yet heard it and approved of it.

People commonly filing for chapter 13 bankruptcy plan are unable to complete their payment plans which results in their cases being dismissed, allowing the creditors to resume efforts on collection of the debt or allowing the consumer to convert his bankruptcy to a chapter 7 bankruptcy.

How to Decide between a Chapter 7 and a Chapter 13 Bankruptcy

When filing for bankruptcy you’ll have the choice of filing a chapter 7 and a chapter 13 bankruptcy. A majority of people choose to file for chapter 7 bankruptcy as that discharges almost all unsecured debts. It is also a fact that while chapter 7 bankruptcy uses assets that are non-exempt under the state law to pay back your creditors, many consumers filing for chapter 7 bankruptcy are able to retain most of the assets. The assets that are exempt or protected from the used by the court to pay the creditors depend upon the state law and are decided by a person appointed by the court. These exemptions usually include household furnishings, clothing is, tools you need to work, retirement accounts and some or all of the equity in your home.

If you want to keep the property that isn’t exempt under the chapter 7 bankruptcy state laws you can still file for bankruptcy but you will have to choose a chapter 13 bankruptcy. Chapter 13 bankruptcy requires the debtor to come up with a repayment plan that will be approved by court. The debtor will make the payment to court the next 3 to 5 years to pay off his debt at the end of which the bankruptcy be discharged.

New bankruptcy law has brought about certain changes to both chapter 7 and chapter 13 bankruptcy filings. People filing for a chapter 7 bankruptcy now need to undergo a means test. This test is to a certain whether there family income is less than the state mean income of the family of that size in that particular state. If a person fails the means test he cannot file for chapter 7 bankruptcy. Both chapter 7 and chapter 13 bankruptcy require a person to take credit counseling with a minimum of two are financed management course not later than 180 days before filing.

Reasons for Filing a Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy

One of the main reasons why you should consider filing a chapter 13 bankruptcy instead of chapter 7 is that under a chapter 7 bankruptcy some of your non-exempt liquid assets can be used and absorbed by the court to repay a part of your debt. If you have secured debts like an automobile loan or a home loan then you may choose to file a chapter 13 bankruptcy so that you can retain these assets. Furthermore, if your family income is above the state median income for your family size, you will not be able to file for a chapter 7 bankruptcy anyway.

According to the U.S. bankruptcy code in order to file chapter 13 bankruptcy, you cannot have more than $922,975 in secured debt and $307,675 in unsecured debt.

In order to decide which bankruptcy to file for and how to go about it is best to consult a competent attorney. Bankruptcy laws are complicated and every situation is different from the other. You should seek the advice of a tax professional or attorney to ensure that your paperwork is filed properly and you have chosen the best option for yourself.

What Is a Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is one of the two major types of personal bankruptcy that ace provided for under the U.S. Constitution. The U.S. Constitution provides every consumer to relieve all or part of the set when he can no longer afford to pay his creditors. Under a chapter 13 bankruptcy a consumer has to pay off his debt partly or all of it throughout 3 to 5 year debt repayment plan. A repayment plan has to be submitted to the court during the time of filing the paperwork for a chapter 13 bankruptcy. After submitting the paperwork and filing for the chapter 13 bankruptcy you are required to begin making payments to the court which further disburses the payments to your creditors. You’re required to start taking the payments immediately even if your plan hasn’t yet been approved of the court.

When there is eventually and hearing to approve your payment plan the creditors can raise objections to the payment amounts. However, it is up to the judge to decide and he has the final say in the matter. Once your repayment plan has been approved you’ll continue making to the court tell the tenure of your debt repayment plan is over. Any remaining debt is then discharge and the creditors and collection agencies no longer have the right to try and collect this amount from you.

What Liquid Assets Can Be Absorbed By The Court In Chapter 7 Bankruptcy?

Liquid assets are those assets that can be used by the court and absorbed other states during the filing of a chapter 7 bankruptcy to pay off your debt is completely or in part. These liquid assets need to be turned over to the courts to be distributed among the creditors as partial or complete payment towards some money debt you owe. Not all assets are liquid assets that can be included in the filing of chapter bankruptcy. Some of the assets are considered the exempt assets while the liquid assets are non-exempt assets. Usually when you file for a chapter 7 bankruptcy trustees appointed you who has the job of going over your financial situation as well as your assets in order to decide which assets are exempt and which are non-exempt and can be liquefied to be used for repayment. Assets that cannot be used to repay the creditors are called exempt assets. Each state has different laws as to which are set can be considered exempt and which is non-exempt. After the distribution of non-exempt liquid assets to your creditors any remaining debt is discharged. The credit is no longer have a right try and collect the debt from you and neither do any third-party collection agencies.

Chapter 7 bankruptcy is one of the two types of us were bankruptcy that applies to consumers under the U.S. Constitution. Under the U.S. Constitution you have the ability to relieve yourself of all part of your debts when you can no longer meet your obligations to creditors and lenders. Under chapter 7 bankruptcy all or part of your debts can be discharged once your liquid assets are absorbed by the State and the court to repay part of your debt.

In order to qualify for chapter 7 bankruptcy you must pass a means test which is meant to prove that your income is less than the state median income level for the family of your size. If you fail this means test you may not be allowed to file chapter 7 bankruptcy and instead may have to take recourse to a chapter 13 bankruptcy instead. In order to file for any kind of bankruptcy be chapter 7 or chapter 13 you must receive credit counseling from an approved credit counseling agency which will also include a minimum of two hour finance management course.

Why file a chapter 13 bankruptcy?

As mentioned before a chapter 7 bankruptcy requires that your liquid assets that are non-exempt under the state law be used to pay off your creditors. You should consider filing a chapter 13 bankruptcy instead if you have a secured debt like a car loan or a mortgage loan that you want to continue paying. Chapter 13 bankruptcy may be a better option if you want to keep certain assets which would be considered as non-exempt liquid assets under the chapter 7 bankruptcy. Furthermore if your income is above the median for your family size in your state you will not be able to file chapter 7 bankruptcy.

According to the U.S. Bankruptcy Code, to file chapter 13, you cannot have more than $992,975 in secured debt and $307,675 in unsecured debt.

Same as chapter 7 getting credit counseling from an approved credit counseling agency is mandatory of filing a chapter 13 bankruptcy.

Bankruptcy laws and filing is complex. It’s a good idea to always seek advice from a good attorney before filing for bankruptcy about the procedure, paperwork involved and which bankruptcy to file for.

What Do I Do After the 10 Years of Filing Chapter 7 Bankruptcy Are Over?

Credit bureau maintains the record or a chapter 7 bankruptcy in the credit report for a period of seven years. After these 10 years are over the record for the bankruptcy and all the accounts included in it are automatically erased from your credit report. However, it is always advisable that you should get a copy of your credit report at this time and double check whether the bankruptcy has been removed not. In case for some reason the bankruptcy is still showing on your credit report you should immediately dispute this information with the credit bureau. The same holds true if any of the accounts that were included in the bankruptcy filing are still present on the credit report.

A bankruptcy is one of the worst things that can happen to your credit report. It seriously interferes with your getting further credit, at least till the time that it is present on your credit report. Even after it has been removed from your credit report, there may be telling signs that will suggest that you had filed for one in the first place. For this reason it is highly recommended that you not get a copy of your credit report from all the 3 credit bureaus but also acquire your personal credit score.

There are several scoring models in place today. The rating and the scores provided with each may differ in number, but typically they all mean the same thing. In case you are planning to apply for a credit from a particular intuition, you should find out what credit rating model do they employ, such as FICO, Vantage Score etc, and get a copy of that.

Credit bureaus like Experian also provide a package that comes with your credit report, credit score and an analysis of your credit score. This will help you see how the creditor will view your credit report. Knowing where you stand beforehand can help you prepare yourself better to deal with the creditor. All the three credit bureaus provide a service where they give you the credit report from all the 3 credit bureaus in one place. They do this for a fee of course. You can get your free credit report once a year from each credit report by visiting www.annualcreditreport.com.

 

To go through the exact procedure of getting a free credit report, click here.