Chapter 7 Bankruptcy Overview
- Chapter 7 liquidation bankruptcy sells off assets to pay back creditors.
- Chapter 7 filers can keep certain property and assets that are exempt from being sold in bankruptcy.
- After bankruptcy, most debts are discharged but some debts still have to be repaid, like student loans and child support.
Losing your job, an economic downturn, or emergency medical bills may leave you with more debt than you can pay. Bankruptcy can be a way for you to get a fresh start and put a stop to collections with an automatic stay.
This page will provide information about Chapter 7 bankruptcy basics. For questions about your situation and whether a Chapter 7 filing makes sense for you, talk to a bankruptcy lawyer in your state for legal advice.
In Chapter 7, sometimes called liquidation bankruptcy, the court will seize your non-exempt property and assets to pay off your creditors. However, bankruptcy is not designed to leave people with nothing. Certain property is exempt (or excluded) from the bankruptcy process.
Deciding whether to file for bankruptcy should not be done casually. It’s always best to explore all your options before asking the bankruptcy court for debt relief.
If you want to file for bankruptcy, you must decide which chapter of the Bankruptcy Code is your best option.
You must meet specific eligibility criteria to qualify for Chapter 7 bankruptcy. These include income requirements, a means test, and completion of mandatory credit counseling through approved agencies.
With Chapter 7, you must meet certain income requirements to have any eligible debts eliminated. Earning less than the median income in your state will generally qualify you to file.
The U.S. Department of Justice maintains a list of median incomes based on family size. Qualification is determined by taking your average income over the previous six months and comparing it to state income figures for families of the same size.
Even if you have an income over the allowable amount, you might still qualify for Chapter 7. The means test determines this. This test is meant to stop people from claiming protections under Chapter 7 when they can repay creditors. Debtors who make too much and fail the means test will likely need to file Chapter 13 bankruptcy instead.
The means test takes certain monthly expenses and compares those expenses to your income. The test determines how much disposable income debtors have left after paying expenses. Even those earning significant incomes may be able to pass it if they do not have enough money left over each month.
Bankruptcy courts may consider other expenses in particular circumstances. Also, disabled veterans who amassed debts while on active duty or performing homeland security assignments are exempt from the means test.
The paperwork for a Chapter 7 bankruptcy case includes the official bankruptcy petition asking the court for debt relief. Other required forms document your income, assets, debts, and expenses. Below is a step-by-step guide to filing for Chapter 7 bankruptcy.
Gather information necessary to fill out the bankruptcy filing forms and schedules, including:
- A list of all creditors, the amounts you owe, and the nature of the creditor’s claims, including personal loans, credit cards, and secured debts
- The source of your income, the amount, and the frequency of payment
- A list of all your property
- A list of your monthly living expenses, including the amount of money spent on food, shelter, clothing, utilities, medicine, and transportation
File the official petition in the federal bankruptcy court serving the area where you live. All official petition forms can be found on the United States Courts website. You must also pay the filing fees with the court clerk.
You must provide the bankruptcy trustee with:
- Copies of tax returns or transcripts from the most recent tax year and of any tax return filed during the proceedings
- Evidence of credit counseling within the previous 180 days and a copy of any debt repayment plan drafted during counseling
- Statement of monthly net income and proof of payment from your employer within 60 days before filing the petition
The court will issue an automatic stay on collection actions as soon as you file for bankruptcy. This will stop wage garnishment, foreclosure on your, bill collectors, and repossessions.
Chapter 7 liquidation still allows debtors to keep property exempt from bankruptcy proceedings. Only non-exempt property can be sold by the trustee and used to repay creditors.
What property is and is not exempt depends on federal and state bankruptcy law. Some states have their own property exemption laws and allow you to choose whether to follow state or federal exemptions. Determining which of your possessions are exempt occurs on a case-by-case basis. In general, items of basic needs of modern life are typically exempt, including:
- Cars, trucks, and other vehicles
- Furnishings and other goods from the home
- Pensions and benefits like Social Security
- Equity in the home itself (homestead exemption)
- Items necessary for work
There may also be wildcard exemptions to provide a catch-all for exemptions up to a certain amount. Many of these categories come with limits and are subject to oversight from the court and the trustee.
For instance, necessary clothing can be kept, but a shoe collection may be sold. Vehicles, homes, and wages may be kept only in portion or up to a specific value. For example, you may not be allowed to keep a $500,000 foreign sports car, but you may be able to keep a family sedan.
The last step is the bankruptcy discharge clearing most of your debts. Individual consumers filing for Chapter 7 receive a discharge in more than 99% of cases.
Remember that a Chapter 7 bankruptcy discharge may not completely wipe the slate clean. Some debts are not dischargeable via bankruptcy. These debts include:
- Alimony and child support
- Student loans
- Debts for certain criminal restitution orders
- Certain taxes
- Debts for personal injury or death resulting from debtor’s DUI/DWI
Filing bankruptcy can be easier with the help of an experienced bankruptcy attorney to help you through the process. They are familiar with bankruptcy rules and can help you maximize your exemptions for the best possible outcome. Talk to a bankruptcy lawyer about your options.
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