Overview

Have you been having a hard time keeping up with your bills? Are you simply making minimum payments or no payments at all on your credit cards? Thankfully, there are federal laws that can help you eliminate your debt and give you the fresh financial start that you need.

In this article, we dive deep into Chapter 7 bankruptcy, the most common form of A man and a woman talk about a bankruptcy form in front of them with a red Bankruptcy stampbankruptcy filed. Often times, Chapter 7 bankruptcy is referred to as a liquidation bankruptcy or straight bankruptcy.

When most people speak of bankruptcy, Chapter 7 is the type they are thinking of.

Chapter 7 bankruptcy allows for the complete removal of almost all consumer debt. We will go over all the necessary qualifications to be eligible for Chapter 7, the steps you need to take, helpful tips, and much more.


Filing for Chapter 7

If you’re pondering the idea of filing for Chapter 7 bankruptcy, take some time to meet with a credit counselor or get a free consultation from a local bankruptcy attorney.

An attorney usually does not charge for an initial consultation. If you take the time to speak to experienced professionals about your financial situation, you might be able to find a better solution than filing for bankruptcy.

Before you begin the process of filing for Chapter 7 bankruptcy, you will need to enroll in and complete a credit counseling course provided by a government approved agency.

This must be completed prior to filing a petition for Chapter 7 bankruptcy. If you own a business, and the primary source of your debt is business-related, you are not required to attend or enroll in credit counseling.


Step 1: The Pre-Filing Steps

If you’ve decided that filing for Chapter 7 bankruptcy is your only hope, here are some steps you will need to take:

Complete a Credit Counseling Course

In almost all bankruptcy cases, you will be required to enroll and participate in aA pair of hands stands over a debt notice with a pencil erasing it credit counseling course, often hosted by a non-profit agency.

The goal of this counseling course is to help educate you as a consumer on the various options available to you.

Credit counselors are ready to handle almost all financial situations. There is even a chance you may find a more feasible alternative to filing for Chapter 7 bankruptcy.

Again, a credit counseling course is a requirement to file for Chapter 7 bankruptcy. If you fail to enroll, the bankruptcy court will not hear your case.

A credit counseling course is also a great way to understand and analyze your finances, especially when it comes to spending.

If you and your spouse are filing a joint bankruptcy petition, you will both need to enroll in the credit counseling course. Remember, these credit counseling courses are designed to help you get your finances on track to repay your debts.

Finding and Meeting with an Attorney

You can file for bankruptcy yourself without the assistance of an attorney, often referred to as “pro se”, but often times self-representation without an attorney rarely ends well.

Be sure that the attorney you speak to is qualified and well versed in bankruptcy law. Although a general lawyer could file your bankruptcy for you, its best to work with a specialist.

If you haven’t searched for an attorney before, there are a few ways to filter through and find the right one for you.

The American Bar Association website offers a complete list of all lawyers and law firms that meet the federal requirements to represent a party in court.

Another great resource is NACBA, which is short for the National Association of Consumer Bankruptcy Attorneys. This list specifies attorneys and law firms that specialize in consumer bankruptcy.

If you have searched and found a lawyer you might be interested in working with, be sure to ask them about their background and the typical clients they represent.

If your attorney has a bankruptcy certification from the American Board of Certifications, it’s a good bet that they are knowledgeable.

You should know that different attorneys will charge different rates based on their qualifications and your current situation. Most bankruptcy attorneys work in small practices, either by themselves or with a few attorneys in-house.

However, “bankruptcy mills” have begun to pop up in recent years due to the sharp consumer need for bankruptcy.

A bankruptcy mill is a type of law firm that has multiple non-lawyer assistants such as paralegals that will work with you throughout your filing.

You make speak with one paralegal about your financials, another about dates and times, and another for collecting filing information, etc.

Although these models prove to be more affordable, it’s hard to get the personal attention that you would get if you worked with a small bankruptcy firm.

If your income is lower than 125% of the federal poverty guidelines, you could potentially qualify for free legal assistance from Legal Aid or Legal Services Corp.

These organizations are nonprofit and provide legal service for people with little to no income. Although the requirements are strict, it can be worth looking into.

Filing for bankruptcy is an intricate process and requires a vast attention to detail. One simple error in your documents could lead your case to be thrown out, without reimbursement of any fees.

A bankruptcy attorney will know exactly what documents need to be filed and when.

When you sit down with an attorney, they will ask you questions about your income, expenses, debts and more. An attorney’s job is to tell consumers what their best option is, whether it’s to file bankruptcy or not.


Step 2 - Filing for Chapter 7 Bankruptcy

Filing a Bankruptcy Petition

Now begins the stage where you and your lawyer will bring your bankruptcy case to court. If you and your attorney have discovered that filing for Chapter 7 bankruptcy is your best option, your attorney will prepare all the necessary paperwork.

The bankruptcy filing your lawyer submits to the court will include your information along with the information from your creditors and lenders who you are indebted to.

Your lawyer will also list any and all current assets, income, and bank transactions for the past three years.

The moment the bankruptcy petition has been filed, you will enter an “Automatic Stay”.  An automatic stay means that any debt collectors or collection agencies attempting to collect from you must cease their collection efforts.

You cannot legally be contacted by any debt collector about your debts.

Your creditors will receive a notification that you have filed for chapter 7 bankruptcy. If a debt collector or collection agency calls you about a debt after filing, be sure to write down their name and company to file a report with the FTC.

Another benefit of an automatic stay is that it stops the foreclosure process, allowing you to stay in your home for now.

The Means Test

Not all consumers will be eligible for Chapter 7 bankruptcy. While Chapter 7 is the “most desired” form of bankruptcy for most consumers, there are strict requirements in place in order to avoid abuse in the system.

Once you submit your filing, you will need to pass a means test.

A means test looks at your income and sometimes debts or expenses to see if you are financially capable of repaying some of your debts.

If the test finds that you do have the means to repay your creditors in some way, the court can stop you from filing for Chapter 7 bankruptcy. Often times, consumers who do not qualify for Chapter 7 file for Chapter 13 bankruptcy.

The first part of passing a means test is to prove that your income is below the median income of your specific state. This test only compares the last 6 months of your income to the state’s average.

If you can prove that you are unable to repay the debts and earn less than your states median income, you have a good chance of passing the means test.

It’s important to gather your expenses such as mortgage payments, groceries, gas, and more to improve your chances of passing. With a means test, there is no appeals process, so no errors can be made.

Once you have passed the means test and have been cleared for bankruptcy, you will receive a court-appointed bankruptcy trustee to oversee your case.

Trustee Review

Anytime you file for bankruptcy, whether its Chapter 7 or not, you will be appointed a bankruptcy trustee to oversee your case completely. The trustee is in charge of handling and coordinating the entire bankruptcy process.

They will serve as a “middleman” between you and your creditors. Once the petition has been filed, a trustee will evaluate your case and assets.

Your trustee will also see if you own any federally “exempt” or “non-exempt” assets. When you file for Chapter 7 bankruptcy, a trustee has the right to liquidate any of your non-exempt assets to repay your creditors.

Thankfully, most states protect the filers assets and most consumers are allowed to keep their property. Some common examples of federal bankruptcy exemptions include social security, public assistance, health aids, tools, and some jewelry.

A trustee will also examine any and all major financial transactions you performed in the past few years to see if any can be undone. If you transferred a large or expensive asset to a family member before filing, the court may think that this was done to avoid having the asset seized in the bankruptcy process.

However, more often than not, the trustee will find that all the debtor’s assets are exempt from liquidation and that there were no purposefully fraudulent activities done.

However, if you have a brand new European convertible sports car sitting in your driveway, there is a good chance your bankruptcy trustee may seize that asset to sell at auction.


Step 3 - Post Bankruptcy Filing

Meeting of Creditors

Once you have filed your bankruptcy paperwork (which “starts” the bankruptcy A man palms his face thinking about his level of debt with the words bankruptcy on the sideprocess) and have met with your chapter 7 bankruptcy trustee, you will attend a meeting of creditors, often referred to as a 341 hearing.

This meeting is completely organized by the bankruptcy trustee and is designed to bring all of your creditors, your attorney, and you together.

The Chapter 7 trustee will issue a “Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors & Deadlines” too all the creditors listed on your bankruptcy documents. This document will include:

  • Your name, address, and other contact information
  • The date, time, and location of the meeting of creditors
  • Instructions on how a creditor can prove a claim (meaning they must prove that you owe them money)
  • A deadline to file an objection to the bankruptcy case

This meeting will take place in a federal building, not a courthouse. There will be no judge present in the meeting of creditors either. You will be required to bring your social security card and also a form of identification to the meeting.

Typically, you will have this meeting between 21 and 40 days after you file for Chapter 7 bankruptcy.

Once in the meeting of creditors, you will answer the questions the trustee asks of you. Your Chapter 7 trustee will ask you about your income, dependants, financial activities, employment, and more.

Once your trustee has finished, your creditors can begin to ask you questions on how you plan on paying them back. Often times, creditors choose not to attend due to the costs associated with travel.

Your creditors also have a legal right to object to the bankruptcy if they feel that it is unnecessary, but this rarely happens. If your creditors do arrive to the meeting of creditors, they will want to know how you will handle your secured debts (like mortgage, auto loan, etc.).

Court Abuse

In no more than 10 days after the meeting of creditors, your bankruptcy trustee will report to the court if there are any signs of “abuse” in your case. Although abuse sounds like a scary word, it really isn’t in bankruptcy court.

All it usually entails is that you may not qualify for Chapter 7 and may have to file for Chapter 13 bankruptcy instead.

A court can assume “abuse” if your total income after all living expenses and costs over the last 5 years is more than $12,475 or at least 25 % of your total non-priority unsecured debts, as long as the total amount is at minimum $7,025.

Education Course

Before a Chapter 7 bankruptcy case can be approved, you are obligated to take part in an “educational course” for debtors. The course will cover many subjects relating to finances and money.

The second course you take will be much more in-depth than the credit counseling course you took before filing.

As soon as you complete the course, you will also receive a certificate of completion.

You are required to submit this certificate to the court before your bankruptcy is made official. If you fail to complete this course, the court could throw out your case.

If you are an American in a rural area, the court could waive this requirement. This also applies to active duty service members who are currently out of the country.

The Official Discharge

Once you have filed your course completion with the court, the judge will order a discharge and mail your creditors a “Discharge of Debtors” notice. Once the discharge has been issued, all your debts listed in your bankruptcy filings will go away.

Your creditors will also list your debts as “settled” or “uncollectible”, which is where the damage to your credit score will come in.


Assets After Chapter 7 Bankruptcy

If you are looking to keep your home during a Chapter 7 bankruptcy filing, you will want to ensure that you are current and up-to-date on your mortgage payments.

A Chapter 7 bankruptcy does not remove or “delete” your past-due mortgage payments. Although filing for Chapter 7 bankruptcy allows you to temporarily halt the foreclosure process, it is just a band-aid.

A home, for example, is considered a secured asset. A secured asset is a type of asset where a physical piece of collateral is provided, which in this case is your home.

The creditor has a right to “seize” that asset in order to recover your debts. The bank will still have the right to foreclose on your home if you are significantly behind on your mortgage payments.

If you want to keep your home but are behind on your payments, Chapter 7 bankruptcy may not be the best choice for you.

Chapter 13 bankruptcy works best for most consumers behind on their mortgage payments, as it allows them three to five years to repay their old past-due balances.

The same applies for an auto loan. If you have financed your car and are behind on payments, a Chapter 7 bankruptcy filing will not “cure” your past-due payments.

Your lender will still have the legal right to repossess your car and sell it at auction to recoup their loss. Ensure that you are current on your auto loan payment, as an auto repossession can damage your credit even more.


Pros and Cons of Chapter 7 Bankruptcy

Pros of Chapter 7 Bankruptcy

  • Wipes out almost all unsecured consumer debts such as credit card debt, medical bills, short-term unsecured loans, etc.
  • Many states have exemptions in place that can protect your assets from being liquidated. You may be allowed to keep certain pieces of property.
  • The sooner you file, the sooner you can work on repairing your credit.

Cons of Chapter 7 Bankruptcy

  • Bankruptcy will ruin your credit for a long time. A Chapter 7 bankruptcy filing can last for up to 10 years on your credit report, which will be reflected in your credit score.
  • You will not be exempted from child support, alimony, or any past-due taxes.
  • Student loans and federal debts like taxes cannot be discharged unless it is in an extremely rare circumstance.

Who Should File for Chapter 7 Bankruptcy?

Choosing to file for Chapter 7 bankruptcy is a massive decision, and should be viewed that way. Understand that filing for Chapter 7 bankruptcy will damage your credit for 10 years.

Lenders and creditors are much more reluctant to lend to borrowers who have had a recent bankruptcy.

A Chapter 7 bankruptcy is best for consumers that have little to no assets but are burdened with an unpayable amount of debt.

Chapter 7 is also ideal for consumers who rent, own a car outright, and have very few physical assets.

If you own a home and other valuable assets, Chapter 13 may be the right bankruptcy filing for you.

If you’ve been paying a high-interest rate on a large sum of debt you know you can’t pay off, bankruptcy may be for you. Although Chapter 7 bankruptcy can ruin your credit for 10 years, you could be stuck paying off a large debt for much longer.

With the added expense of interest payments each month, bankruptcy is a great way to save money as well. If your credit score is already far from perfect, bankruptcy can finally give you the chance to get a fresh start with your finances and work on improving your credit score.


Chapter 7 vs. Chapter 13

Although most consumers tend to associate Chapter 7 bankruptcy as the ultimate way out of debt, it is extremely hard to qualify for. Less than 15% of all Chapter 7 applicants were able to pass the means test and proceed to file.

This is because most consumers cannot prove that they meet the income and eligibility requirements set forth by the state to be considered for Chapter 7.

Chapter 7 bankruptcy will stay on your credit report for a period of 10 years, while Chapter 13 lasts for 7 years. The requirements to file for Chapter 13 bankruptcy also make it much easier for consumers to qualify, the opposite to Chapter 7 bankruptcy.


Final Note

Deciding to file for Chapter 7 bankruptcy is not an overnight choice. If you have been buried with a large amount of high-interest debt, bankruptcy may be the best option available.

Remember, the government allows consumers to file for bankruptcy as a form of protection against a lifetime of debt.

Many consumers have a fear of bankruptcy due to the worry that their friends, co-workers, and family members will find out. Although all court records are available to the public, somebody must go to your local courthouse and ask for the court documents in order to find out that you have filed for bankruptcy.

If you are buried under a mountain of debt and ready for a fresh start, CrediReady can help. Our nationwide network of trusted and experienced lawyers are prepared to give you a FREE bankruptcy consultation to help you. Take a moment to fill out our inquiry form today to speak with your FREE attorney.