Chapter 7 bankruptcy is a legal process that allows people to clear most or all of their debt and is a process that may be more common than you think. It is estimated that over 40 million people in the U.S. have filed for bankruptcy. Bankruptcy is an important legal tool that can provide significant debt relief but it is also a complicated process. It is important to be aware of eligibility, impact of filing, and common issues people experience. This expands your understanding of Chapter 7 bankruptcy as well as better helps you prepare and know what to expect from the process!
What is Chapter 7 Bankruptcy?
Bankruptcy is designed to legally alleviate the debt burden for people who are unable to repay their debts. To file for this specific type of bankruptcy, requirements include:
- having finances assessed by a government-approved credit counselor to determine that debt cannot be repaid.
- passing the means test: earning less than the median income in your state. This also includes those who do not have a job.
Chapter 7 bankruptcy can eliminate many forms of debt but not all. Common debts that it can eliminate are referred to as dischargeable debts which include the following:
- Credit card debt
- Car loans
- Medical bills
- Utility bills
- Personal loans (including payday loans)
- Claims from debt collection agencies
Debts that cannot be erased through a Chapter 7 bankruptcy filing are known as non-dischargeable debts and include:
- Student loans
- Child support and/or alimony
- Debts recently owed to the government (i.e. fines)
It is also important to know about secured debts. This type of debt is debt that is attached to property; common examples are a mortgage that is backed by a house and a car loan attached to a car. If you want to keep this type of property, Chapter 7 bankruptcy does not erase the secured debt.
Common Issues to Avoid
Filing for Chapter 7 bankruptcy involves completing paperwork, compiling financial documents like tax returns and pay stubs, taking a credit counseling course, and submitting this information to the bankruptcy court. A court-appointed trustee will handle your case, review your forms, and meet with you. They then make a decision and notify you of the update within 3-5 months typically.
When providing such detailed information, there are various mistakes that people can make. Being aware of common issues can help you avoid these pitfalls and ensure that the process runs as smoothly as possible. Common issues include the following:
- Need to file: it is important to know the specific type of debts that bankruptcy can and cannot tackle before filing. Consider the debts you have and be certain that filing for Chapter 7 bankruptcy can eliminate those debts.
- Filing the wrong chapter: there are two types of bankruptcy that you can file for: chapters 7 and 13. There are key differences that you should know about and consider before filing. The main difference is that Chapter 13 does not eliminate debts but offers a repayment plan based on an individual’s ability to repay specific debts. People who file a Chapter 13 rather than 7 typically do so because they have a higher income (and therefore do not meet the income requirements for a Chapter 7) and/or they have property they want to keep.
- Missing information: the bankruptcy process involves extensive documents, forms, and detailed information. In addition to completing a significant federal packet, there are also court forms to complete. It is incredibly important to carefully and thoroughly provide all required documents and information. Not doing so can prolong the process or even lead to a dismissal of your case.
- Failing to meet requirements: filing for Chapter 7 bankruptcy requires meeting with a credit counselor as well as completing a financial management course. Evidence of completion is required and failing to do so can also result in a dismissal of your case. Additionally, you will be required to attend a hearing with the trustee appointed to your case. This is mandatory and should not be missed!
- Avoid unnecessary transactions: additional mistakes to avoid also include transferring money or property, making large purchases using credit cards, and incurring additional debt.
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