Chapter 7 Bankruptcy
Also known as “straight bankruptcy” or “debt liquidation”, the Chapter 7 bankruptcy process generally offers the most complete form of debt relief to individuals and businesses struggling under the crushing weight of too much debt.
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Chapter 7 bankruptcy is one of two primary forms of bankruptcy protection available to individuals with a large amount of outstanding debt. Chapter 7 bankruptcy is capable of eliminating most, if not all, of your debts. Though it isn’t the best option for every debtor, it is ideal for individuals with limited means and a significant debt load.
The Means Test
To be eligible for Chapter 7 bankruptcy, you must pass the means test. To pass the means test, your disposable income must be insufficient to pay your outstanding debts. If your current income is less than the median income for households of the same size in your state, you will pass the means test automatically. If your monthly income exceeds the median, however, the calculations become more complex. The bankruptcy court will total your monthly income, subtract your necessary expenses and compare the amount that remains to your monthly debts to determine whether you qualify for Chapter 7 protection.
The Bankruptcy Process
After you pass the means test and begin the bankruptcy process, you will fill out forms that describe your debts, property, living expenses and monthly income to the court. You will also list the assets you want to protect from the proceedings. Utilizing federal exemptions, most people are able to protect all of their clothing, vehicles, some or all of the equity in their home, household goods and furniture, equipment, business tools, and all other necessities.
After you have submitted the required paperwork, an automatic stay will prevent your creditors from taking any actions to collect your debts. They will be unable to garnish your wages, seize your property or even contact you. At this point, if you have any unprotected assets, the bankruptcy trustee can sell them to pay a portion of your debt. The debt that remains after your unprotected assets are depleted will be discharged by the bankruptcy court, which means that you will no longer be responsible for paying it.
After Chapter 7 Bankruptcy
When the bankruptcy process is complete, you will regain control over your own finances. Creditors with debts that were discharged during the proceedings will no longer be able to contact you, nor will the debts continue to decrease your credit rating. It will allow you to keep your home and cars if you are current on the payments. However, if a debt was secured by collateral and you are not current on your payments, such as a home or car, the creditor retains the right to seize the collateral and sell it to recover what you owe.
After bankruptcy, your credit score will likely be lower than it was before you filed. The bankruptcy itself will remain listed on your credit report for up to seven years, and it may continue to affect your credit score during that time. You can apply for new credit immediately following discharge, though you may not be approved right away. In most cases, you can qualify for an unsecured credit card approximately 18 months after filing for bankruptcy protection. To qualify for larger loans, such as mortgages, most lenders will require you to show three years of stable credit.
Don’t cash in your retirement savings. If bankruptcy is the best solution for you, those retirement accounts cannot be touched by your creditors. Don’t put everything you’ve worked so hard for at risk by pursuing a short-term fix that does nothing to address underlying issues. Talk to an experienced bankruptcy attorney first.
If you are eligible for Chapter 7 bankruptcy, the discharge will eliminate most types of unsecured debt, including credit card balances, medical bills and other obligations not attached to real property. It can also put an immediate end to creditor harassment, stop IRS penalties and interest from continuing to mount and stall home foreclosure proceedings, at least temporarily. The vast majority of people who file for Chapter 7 bankruptcy protection are able to keep most, if not all of their personal possessions.
Having said all of that, filing a Chapter 7 bankruptcy will not fix every problem.
- It will not eliminate all debt. Recent tax debts (less than three years old), alimony, child support, drunk driving debts, personal injury judgments, court fines, restitution and student loans (except in rare circumstances) — cannot be discharged in a Chapter 7.
- It will damage your credit, but it won’t destroy it. In fact, you might be surprised by how quickly you start receiving credit offers after the discharge. An excellent way to start rebuilding your credit immediately is to apply for a secured credit card where you can make automatic payments and control your credit limit.
- It will allow you to keep your home or car if you can immediately make good on any past due amounts and you may need to enter into a reaffirmation agreement with your lender.
If you are not eligible to file under Chapter 7, because you have non-exempt assets or property that you want to keep, or you are uncomfortable with the idea of not paying off at least a portion of the debt you owe, you may want to consider reorganizing your debts under Chapter 13.
Learn more about the Chapter 7 bankruptcy process or contact our law office directly to speak to a bankruptcy specialist.