What is Chapter 7 Bankruptcy?
Chapter 7 is known as the “liquidation bankruptcy’’ because it discharges most of your unsecured debt. That includes credit card debt, medical bills and personal loans.
It’s the quickest, simplest and most common type of bankruptcy. About 63% of the 774,940 bankruptcy cases filed in 2019, were Chapter 7.
An even more encouraging bankruptcy statistic: 94.3% of Chapter 7 filings had their debts discharged. You must pass a “means test’’ to qualify for Chapter 7 filing. The means test examines financial records, including income, expenses, secured and unsecured debt. You must qualify under income limits that vary by state. There are also debt requirements. For better or worse, some people don’t have enough debt to qualify. As a rule of thumb, I generally do not file bankruptcy for clients with less $10,000 in unsecured debt (credit cards). You might be forced to sell any non-exempt assets, although important assets like home, car (provided you don’t have a lot of equity in the car), equipment for work, are exempt and can be retained. Although if you are a risk of losing that asset, we will have you file a Chapter 13 Bankruptcy Instead.
Generally, the Chapter 7 process can be completed in three to four months.
Filing for bankruptcy can be a traumatic experience, particularly for people who believe some of the “myths’’ that supposedly surround the process.
Some of the myths include:
Losing Everything — Actually, the majority of Chapter 7 filings are “no-asset cases,” meaning the debtor gives up no possessions. The law allows you to retain basic assets necessary for day-to-day life, like your house, car, computers or other equipment needed for you to work. These are called exemptions. Beyond that, it’s likely that creditors won’t want the possessions that aren’t covered under exemptions.
Relief from ALL Debts — As a general rule, debts you are deemed personally responsible for – taxes, alimony, child support, student loans – won’t be forgiven. Some consequences can’t be erased.
Paying off Debts Is a Better Decision — Maybe. But maybe not. If your debts are more than 50% of your annual income — and you can’t see a way to pay them off within five years — bankruptcy is the best choice to achieve a long-term, debt-free life.
Bankruptcy Is a Personal Failing — It’s not an admission of failure or a character flaw. Filing bankruptcy is a financial remedy, especially if unforeseen events occur in your life. Things like job loss, meltdowns in the real estate market and especially medical emergencies, aren’t easy to predict. The fact is, medical bills account for more than half of the bankruptcies in America.
Bankruptcy Will Ruin Your Financial Future — Yes, credit will be difficult to obtain. Yes, higher interest rates will be a given for the 10 years the bankruptcy is expected to remain on your credit report. But in time, there is a way back. Many people have prospered after taking the short-term hit that comes with filing for bankruptcy. We have many clients that are able to buy a home within 2 years from receiving their Chapter 7 Discharge.