If you are under a lot of debt, you should consider filing for Chapter 7 bankruptcy to give yourself a second chance financially. Chapter 7 bankruptcy is a type of bankruptcy in which a portion of your property is sold, and the money is used to pay off some of your debts.
If you do not have any property that can be sold, your debt is discharged and removed from you as the bankruptcy case ends. If you want to file for a chapter 7 bankruptcy, you first need to understand what it actually is and who qualifies for filing for a chapter 7 bankruptcy.
Understanding Chapter 7 bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, discharges nearly all of your unsecured debt. This includes medical bills, personal loans, and credit cards debt. Chapter 7 bankruptcy is the simplest, most common, and quickest type of bankruptcy available. According to the statistics, 63% of the bankruptcy cases filed in 2019 we filed under Chapter 7 bankruptcy. In fact, an even more interesting value, according to statistics, is that 94% of the Chapter 7 bankruptcy cases had their debts and dues forgiven.
In order to qualify for filing for Chapter 7 bankruptcy, you should pass a ‘means test’. This test evaluates all your financial records and status, including your income, expenses, unsecured and secured debts, in order to determine whether your income is below the median income of the state you live in.
The medium income varies from state to state. Most of the online websites claim that 97% of chapter 7 cases are no-asset cases. This means there is not enough property or property value that can be sold and the money used to pay off creditors. However, that is not the case. In reality, you might be forced to sell non-exempt assets. Chapter 7 bankruptcy can take from four up to six months for completion.
Debts that can’t be forgiven under Chapter 7 bankruptcy
Chapter 7 bankruptcy helps you start fresh financially by removing the burden of most of the debts. However, there are some debts that cannot be discharged even by Chapter 7 bankruptcy. Debts that are not forgiven under chapter 7 bankruptcy include child support, court fees, court penalties, alimony, tax liens, and personal injury debts due to accidents in which you were drunk.
Apart from these six debts, the rest of the debts can be discharged in Chapter 7 bankruptcy. So the discharged debts completely overshadow the non-dis-chargeable debts. The list of debts that can be discharged in a chapter 7 bankruptcy includes medical bills, credit card debt, personal loans, income tax debt, mortgage or automobile loans, student loans, HOA fees, and any other form of unsecured debt.
How to qualify for Chapter 7 Bankruptcy
You can’t just go and file for Chapter 7 bankruptcy. You must qualify for it as not every person can file for Chapter 7 bankruptcy, especially people who can afford to pay off their debts on their own or can file for Chapter 13 bankruptcy. Below are the criteria for qualifying for chapter 7 bankruptcy.
You haven’t been dismissed by bankruptcy law recently
You are not eligible for filing for Chapter 7 bankruptcy if you have had your bankruptcy case dismissed by court since the past six months for the following reasons:
- Abused the bankruptcy law
- Violated court rules and orders
- Your bankruptcy case was a fraud or lie
- Requested for your bankruptcy case to be dismissed by the court because of the creditor
You haven’t been recently discharged from bankruptcy
According to the law, you cannot repeatedly continue to collect debts and have them discharged through the bankruptcy laws in court. You are not eligible to file for Chapter 7 bankruptcy if you have recently been released from Chapter 7 bankruptcy (nine years) or for Chapter 13 bankruptcy (six years).
Received credit counselling
In order to file for Chapter 7 bankruptcy, you have to complete a credit counselling course. Credit counselling is offered by many non-profit credit counselling agencies. You need to complete your credit counselling before your case is completed. Suppose you haven’t completed it before filing for bankruptcy.
The credit counselling session includes a financial management course that helps you take care of your finances in a way that you will not be under debt again. Not all credit counselling agencies are non-profit. However, they should offer you their services at a lower cost or free of charge if you cannot afford their services otherwise. If you do not complete your credit counselling course within the given time period, your bankruptcy case will be closed by the court.
You are a small business, married, or an individual
In order to file for Chapter 7 bankruptcy, you should fall in one of the below-mentioned categories:
- You are a married couple
- You own a small business
- You are a business partner with someone who is not your spouse
- You are an individual
If you are part of cooperation, business partnership, or LLC, you are not eligible for filing for Chapter 7 bankruptcy. In such a case, you should file for the business Chapter 11 bankruptcy.
Means test passed
As mentioned above, the means test evaluates your financial records in order to find out whether you are eligible for Chapter 7 bankruptcy. This test evaluates your income and sees whether it is higher or lower than the state’s median family income. If it is higher than the state’s median family income, then Chapter 7 bankruptcy is not your greatest option.
You need to pass the means test if nearly half of your debt is due to consumer purchases instead of business, tort debts, or tax debts. Personal injury debts fall under tort debts. They are debts due to injuries you inflicted upon someone else. If you do not pass the means test, then that means you are financially capable of paying your debts.
Get in touch with an attorney
If you are thinking of filing for Chapter 7 bankruptcy, it is recommended that you contact a skilled and experienced attorney. The attorney will help you build your case, give you legal advice, represent you in court, and make sure you fit the criteria for filing for Chapter 7 bankruptcy. Sasser Law Firm has the best attorney in town and will help you win your case so you can start fresh financially.
When should you file for chapter 7 bankruptcy?
Following are the five most important warning signs that you should file for chapter 7 bankruptcy immediately:
1) Your debts are out of control and total more than half of your yearly income.
2) You have very little income.
3) Your monthly income is lower than the median monthly income in your state
4) It would take four years or more to pay off your debts
5) Your debts have serious implications on other aspects of your life, such as relationships and your overall health and well-being.
Procedure for filing for chapter 7 bankruptcy
If you are thinking about filing for Chapter 7 bankruptcy, then you should find an experienced and skilled bankruptcy attorney. Finding a great bankruptcy attorney is the most important factor, and the result of your case depends on it. Once you have decided on a bankruptcy attorney, you can refer the creditors to your lawyer.
Once they file a petition, the creditors can no longer file a lawsuit against you, garnish your wages or contact you regarding your pending debts. If you are qualified for filing for Chapter 7 bankruptcy, it will take four to six months to complete the bankruptcy procedure. Here is how you file for chapter 7 bankruptcy:
- In order to begin the process, you will have to fill out many forms regarding your assets, liabilities, expenses, monthly income, financial status, and any existing leases or contracts.
- The next step is to take the credit counselling course. These courses are offering by government-authorized nonprofit credit counselling agencies. This course takes a look at your financial status and situation in order to determine whether there is any other way to solve your debt crisis without having to file for bankruptcy, such as debt management, debt consolidation, and debt settlement.
- If it is decided that filing for bankruptcy is the best shot you have at cleaning your slate, then your attorney must fill out all the forms mentioned in step one and file for a petition for bankruptcy in the local court.
- As soon as this happens, you will have to start paying for the process. Some of the expenses you must endure include petition filing costs, court fees, and attorney fees, all of which can total up to $2000 or more. Filing for bankruptcy includes a lot of paperwork, and you will probably be featured in the newspaper and on the website, which makes the loss of privacy a major setback.
- Once you have filed your case, the court will appoint your case to a bankruptcy trustee who will validate the authenticity of your documents. You will have to submit copies of your paycheck, tax returns. And bank statements to the bankruptcy trustee so that they can verify the documents you have filed.
- Next, you will have to attend a meeting with the trustee and the creditors. In this meeting, you are required to answer any questions and queries the trustee or creditors may have regarding the documents you have filed o provided. The trustee might recommend that your case is more fit to be filed under Chapter 13 than under Chapter 7. The creditors have around ninety days from the meeting to file a lawsuit that the debt should be eliminated by the court in the bankruptcy.
- Next, you need to make sure that you fulfil all and any promises you made while taking the debt.
- You need to take a second counselling session known as debtor education. This session is offered by nonprofit credit counselling agencies and will help you learn how to handle debt so that you don’t end up caught up in debt and in court all over again.
- Finally, if everything goes smoothly, the judge will forgive your debts, and you will no longer be under any legal obligation to pay the debts.
Once all of this is over, you will be a mess financially. However, you will have a clean slate which means you can start all over again. But this time, you should set up a budget and seek a secured credit card in order to ensure you do not suffer the same way again.
You will need to work on yourself and change your spending habits. Attending credit counselling courses regularly will help you keep your finances in check and is highly recommended. You should make sure that you pay your bills on time and not let them collect up.
Also, make sure you never use credit cards or leans as an extension of your income. In order to protect yourself from debt, you need to take control of your life and finances. Pay proper attention to your budget, spending, and live within what you can afford. You should be thankful for whatever little you have and not try to achieve a luxurious lifestyle that you cannot afford. Your main goal should be to not end up in the same mess you just got out of.
The days and months that follow your bankruptcy termination can be very tiring and challenging. However, you should not give up and work towards achieving financial stability, happiness, and humbleness. Bankruptcy will be present on your credit reports for up to ten years. So it is important that you mention it on your government reports, employees, medical reports, and other documents.
The nonprofit credit counselling agencies are there to help you in your tough times. They will help you learn how to build healthy monthly budgets that are easy to follow and maintain. A few years of good practices and changes to your spending will make it seem like all of this never happened, and you will again be on the road to success with a bright future. Be hopeful and never ever give up. Remember that tough days do not last forever, and eventually, you will get through the rough patch. And the path ahead of the rough patch will be beautiful, peaceful and will make you forget the days you were not at your best.
Tommy Williamson did his degree in psychology at the University of Edinburgh. He has an ongoing interest in mental health and well-being.
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