What is Chapter 7 bankruptcy?

Chapter 7 is the bankruptcy provision most frequently used by individuals. Those who reside in, or own property or a business in, the United States can file for Chapter 7 bankruptcy.

Chapter 7 involves the complete liquidation of a debtor's property to pay creditors and wipe out remaining debts, giving the debtor a fresh start. It's important to know that it will stay on a person's credit report for ten years. However, it is likely that if you believe you need to file for bankruptcy, your credit has already been affected by your high debt.

The Process

In a Chapter 7 bankruptcy, individuals can wipe out many types of unsecured debt. Unsecured debt is debt that you do not have to put up collateral for, such as a debt incurred from a credit card, or medical bills. The Chapter 7 bankruptcy filing process takes about four to six months, and costs about $300. Before you can file for Chapter 7 bankruptcy, you must go through credit counseling with an agency approved by the Untied States Trustee, and complete a debtor education course. While you are allowed to keep some of your assets, other assets are sold by the interim trustee to repay some of your creditors. The interim trustee is an individual appointed by the United States Trustee, and many times will oversee the entire bankruptcy process.

It is important to know that not all debt is discharged under Chapter 7 bankruptcy. Mortgages typically survive bankruptcy, as do car payments. This means that while you will not be forced to sell your home when you file, it may still be foreclosed on. Child support, spousal support, back taxes that are less than three years old, and any judgments from a court are generally not discharged either. Student loans may be discharged, but only if the debtor is able to show extreme hardship, which is difficult to prove.

Who Can File?

In recent years, the process for filing bankruptcy for consumers has become more difficult. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 to ensure that people would not be able file Chapter 7 bankruptcy when they were able to pay off their debts.

The most important element to come from this act was a measurement known as the means test. The means test shows whether a debtor is in sufficient debt to file for liquidation under Chapter 7 by comparing their income to the average income of the state. If it is found that the debtor's average income exceeds the median state income, they must apply the means test. The means test is applied by subtracting presumed expenses, such as living expenses, healthcare, and education, from the debtor’s average income. Depending on the amount of money leftover, if any, the debt will either qualify for Chapter 7 bankruptcy, or else they must file for Chapter 13 which consolidates their debts instead of wiping them out completely.

Further, if you have had a recent bankruptcy discharge, you will not be able to file again until after a six to eight year waiting period, depending on the type of bankruptcy that you previously filed for.