What is Chapter 7?
Chapter 7 bankruptcy is a “liquidation” bankruptcy. In a Chapter 7, you do not have the means to pay, don't have any assets which are available to pay creditors, and need the help of the Court to eliminate your debt. A Chapter 7 lasts ninety (90) days from start to finish, involves one hearing for which your attendance is mandatory, and two counseling classes (pre & post filing).
The goal is a discharge in your case. Discharge is a court order notifying your creditors that you have no further liability for the debts which were included in your case. Unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will usually issue a discharge order within 60 days after the date first set for the meeting of creditors.
Who can file Chapter 7?
How do you know if you are eligible to file? To file a Chapter 7, a debtor may be an individual, a partnership, or a corporation or other business entity. However, there are certain requirements to file including whether you have had a prior bankruptcy case and income qualifications (“the means test”).
The length of time you have to wait will vary depending on the type of bankruptcy you previously filed and what you intend to file in the future. To be relieved (discharged) of debt, you must wait:
- Prior 7, new 7 - 8 years
- Prior 7, new 13 - 4 years
- Prior 13, new 13 - 2 years
- Prior 13, new 7 - 6 years*
The waiting periods run from filing date to filing date.
*unless you paid 100% of the allowed unsecured debt in the prior Chapter 13 or paid 70% of the unsecured debt in good faith and with best efforts.
Most people want to file Chapter 7. It's fast, its relatively painless, and you are finished in ninety (90) days. However, you must qualify by passing “the means test”. If your current monthly income is more than the state median income for a household of your size, the Bankruptcy Code requires application of a "means test" to determine whether the chapter 7 filing is preemptively abusive. If the means test is failed (ie: you make too much money) you will be required to file a Chapter 13 unless you can show special circumstances. Let us help you navigate this test.
Why file Chapter 7?
Most people file bankruptcy because they simply cannot afford to pay and maintain a meaningful standard of living. One of the primary purposes of bankruptcy is to discharge certain debts to obtain a "fresh start." Once debts are eliminated, you have no further liability for those discharged debts. That's a pretty powerful thing, being able to eliminate thousands of dollars of debts because you don't have the financial means to pay. However, there are limitations.
Some types of debts are not discharged in Chapter 7 and will require payment plans after bankruptcy. Those include liens on property, domestic support obligations (child support and spousal support), anything awarded in a divorce decree, taxes, student loans, most taxes, criminal restitution and fines from driving under the influence, to name a few.
What are the advantages of Chapter 7?
- You don't have enough income to maintain a meaningful standard of living and repay your debt.
- Your debt is wiped out allowing you to move forward with no further monthly payments.
- Your paycheck is no longer garnished for the benefit of your creditors.
- Your equity in your real estate and personal property is protected and not reachable by creditors (have attorney review this with you to be sure).
- It's a short process – 90 days in total.
- You receive your discharge sooner. In Chapter 13 = 3 to 5 years. Chapter 7 = 90 days.
- You can begin rebuilding your credit sooner.
- You get your fresh start and life back!
Why not file a Chapter 7?
- The overall amount of your debt is a better fit for debt negotiation.
- You have a bankruptcy on your credit report for 10 years.
- You are judgment proof (social security income only) so no creditor can attach your assets or income anyway.
- You have a co-signor on your debt who your creditors will pursue once you discharge your personal liability on the obligation.