If you are burdened with high credit card bills, medical expenses, or overdue loan payments, it can feel like a mountain you’ll never dig out from under. There is nothing wrong with falling behind, as the debt system doesn’t provide much help for those who come on hard financial times. If you are a responsible person who just lost a job or suffered a loss, then your debt shouldn’t be something that you have to worry about or carry with you for the rest of your life. That’s why bankruptcy can be an effective solution to hit the reset button. There are two kinds of bankruptcy available for typical people: Chapter 7 and Chapter 13. Chapter 7 bankruptcy eliminates debt quickly and completely, while Chapter 13 requires a 3- or 5-year repayment plan. Check out our page on Chapter 13 bankruptcy for more information.
If you are looking into Chapter 7 bankruptcy, there are some basic facts you need to know. Chapter 7 bankruptcy typically has some concessions, mostly involving assessment of property like cars or homes, as well as a series of tests to see whether you are qualified due to income. Your bankruptcy trustee (the person working on the bankruptcy itself) will sell property to pay creditors before your balance is wiped clean. However, you can exempt certain kinds of property (like an inexpensive car) and keep it outside of your bankruptcy proceedings.
Chapter 7 bankruptcy could be the solution to your debt problems. But not everyone qualifies for Chapter 7. Here, we will discuss Chapter 7 qualifications, property issues, debt discharge, and the process itself.
Do I Qualify?
To determine financial eligibility, you have to pass an examination known as the “means test.” The means test takes your average gross income over the past six months and compares it to the median income of your state of residence. If your income is less than the state median, you qualify automatically. If not, don’t lose hope: even if your income is greater than the state median, you can deduct certain expenditures like income tax payments, childcare, and health care premiums or payment.
You can find out what your state median income is through the U.S. Trustee website. Select the most recent date in the “Data Required for Completing the 122A Forms and the 122C Forms,” followed by the “Median Family Income Based on State/Territory and Family Size” link.
Property Rights—What Can I Keep?
The good news is that you can keep some of your private property despite declaring bankruptcy. Depending on state laws, you can “exempt” property that serves an essential household purpose. These include
- household staples like bedding and kitchenware,
- cars (as necessary transportation),
- your home,
- retirement and Social Security Benefits, and
- tools integral for the performance of your profession.
Other property that is not exempt becomes part of the “bankruptcy estate” and is sold so pay down your debt. Often, many people looking to file Chapter 7 can keep much, if not all, of their property for the simple reason that they do not own any non-essential or non-exempt property. In fact, non-exempt property typically refers to larger and more recreationally-oriented objects like
- large parcels of land or secondary homes,
- rental property,
- time shares,
- artwork, collectibles, or tradeable commodities,
- investment accounts not earmarked for retirement, and
- stock or other ownership stakes in LLCs or corporations.
As you can see, there is a clear difference between exempt and non-exempt, which is a good thing because you can consider Chapter 7 bankruptcy without losing essential goods and resources. Furthermore, if you have a lot of non-essential property it can be in your interest to use it to reduce your debt balance.
Example 1: Sally has $65,000 in credit card debt and a $5,000 painting she won in an auction. At first, she resists giving up the painting, but decides to declare Chapter 7 bankruptcy regardless because while she would like to keep the painting, she would rather clear her debt outright. The sale of the painting would reduce her credit obligation to $60,000.
Example 2: Sally decides that she really wants the painting. Since the trustee doesn’t care who buys the object, he offers sally a %20 discount, and sets up a plan with Sally to pay off the balance of the painting of 12 months.
What’s better, even if you need to relinquish non-exempt property, it’s possible to purchase that property back from your bankruptcy trustee, usually at a discount.
Exemptions are based on state and/or federal guidelines, depending on your location. Exemptions for property in Phoenix, AZ will differ from those in Denver, CO. Other states might give you options to select between state or federal laws, and California law dictates two individual state guidelines.
What Debts Are Discharged Under Chapter 7 Bankruptcy?
A “discharge” means that the debts are completely wiped out. This includes almost all unsecured debts like credit cards, personal loans, lawsuit judgments, medical bills, income taxes (over three years old) and utility bills. Debts not included in Chapter 7 are
- Priority Unsecured Debt, like child support payments, government fines, and most income taxes),
- Government student loans, and
- Secured debt like a mortgage or car loan.
First, file a petition with the court that discloses property, income, debts, and financial transactions. Your lawyer will typically do this for you, so bring your paystubs and tax returns to any meeting with a bankruptcy attorney. This will help them file your motion and determine of Chapter 7 is right for you.
Once you file the petition, the process has started and creditors and their authorized collectors can no longer contact you. This is called a “stay,” and it remains in effect for the duration of the process and through its completion. Hassling calls will cease.
Then, with 30-45 days, the bankruptcy trustee will call a “341 Meeting of Creditors,” which you are required to attend. Prior to this meeting, you provide the trustee what are called the “541 Documents,” which include
- Paycheck stubs,
- Banking and retirement statements,
- Mortgage payments,
- Tax returns,
- Car titles, and
- Any relevant marital settlement or profit loss statements (in case of divorce or business ownership, respectively).
This material is typically required 7 days prior to the 341 meeting. The 341 meeting is also the only meeting you are required to attend.
At the meeting, you’ll provide proof identity (typically Driver’s License and Social Security Card). After a series of questions regarding income, debt, and the truthfulness of your paperwork, you’ll be asked for any last-minute changes. Creditors can and may show up to this meeting, but often do not. Most meetings are under 5 minutes.
How Long Until Discharge Takes Affect?
60 days after your 341 meeting, the court will mail you the discharge notice. If you have no assets to settle (that is, no non-exempt property) then the you will receive a dismissal. Otherwise, the process could take longer to resolve any outstanding property sales. This process takes as long as it takes the trustee to sell your non-exempt property and distribute funds to the creditors.
Things to Consider When Meeting Your Bankruptcy Attorney
- Am I better served by filing Chapter 7 bankruptcy, or Chapter 13 bankruptcy?
- How long will this bankruptcy affect my credit report?
- How difficult will it be to gain a job, rent a house, or get lines of unsecured credit after filing bankruptcy?