Chapter 7 Bankruptcy
Will it work for you?
Chapter 7 bankruptcy, also known as a straight or liquidation bankruptcy, is a type of bankruptcy that can clear away many types of unsecured debts. If you’re far behind on your bills and don’t have the means to afford monthly payments and living expenses, filing Chapter 7 bankruptcy could be a last resort to help you reset your finances. However, you may have to give up some of your possessions, and it will have a long-lasting negative impact on your creditworthiness.
When you file for Chapter 7 bankruptcy, the court places an automatic temporary stay on your current debts. This stops creditors from collecting payments, garnishing your wages, foreclosing on your home, repossessing property, evicting you or turning off your utilities. The court will take legal possession of your property and appoint a bankruptcy trustee to your case.
The trustee’s job is to review your finances and assets and oversee your Chapter 7 bankruptcy. They will sell certain property the bankruptcy won’t let you keep (nonexempt property) and use the proceeds to repay your creditors. The trustee will also arrange and run a meeting between you and your creditors—called a creditor meeting—where you’ll go to a courthouse and answer questions about your filing.
The list of property you don’t have to sell or turn over to creditors (exempt property), and the total value that you can exempt, varies by state. Some states let you choose between their exemption list and the federal exemptions. But most Chapter 7 bankruptcy cases are “no asset” cases, meaning all of the person’s property is either exempt or there’s a valid lien against the property.
At the end of the process, approximately four to six months from your initial filing, the court will discharge your remaining debts (meaning you don’t need to pay them anymore). However, some types of debts generally aren’t dischargeable through bankruptcy, including child support, alimony, court fees, some tax debts and most student loans.
Chapter 7 and Chapter 13 are the two common types of bankruptcy that affect consumers. Either could help when you don’t have the means to pay all your bills, but there are important differences between the two.
A Chapter 7 bankruptcy can wipe out certain debts within several months, but a court-appointed trustee can sell your nonexempt property to pay your creditors. You also must have a low income to qualify.
A Chapter 13 bankruptcy allows you to keep your stuff and get on a more affordable repayment plan with your creditors. You’ll need to have enough income to afford the payments and be below the maximum total debt limits (currently nearly $400,000 for unsecured debts and $1 million-plus for secured debts).
A court will approve the Chapter 13 repayment plan, which usually lasts three to five years, and your trustee will collect your payments and disburse them to your creditors. Once you finish the plan, the remainder of the unsecured debts is discharged.
There are a few requirements you’ll need to meet to file for a Chapter 7 bankruptcy:
- You generally must complete an individual or group credit counseling course from an approved credit counseling agency within 180 days before filing.
- Either the average of your monthly income during the previous six months must be less than the median income for the same-sized household in your state or you must pass a means test, which determines if your disposable income is high enough to make partial payments to unsecured creditors. If you don’t pass the means test, you may still be able to file a Chapter 13 bankruptcy.
- You can’t have filed a Chapter 7 bankruptcy during the past eight years.
- You can’t have filed a Chapter 13 bankruptcy during the past six years.
- If you tried to file a Chapter 7 or 13 bankruptcy and your case was dismissed, you have to wait at least 181 days before trying again.
- You may be eligible to file, but a court could dismiss your case if it determines you’re trying to defraud your creditors. For example, if you take out a loan or use credit cards with the intent of then declaring bankruptcy to avoid repaying the debt.
A Chapter 7 bankruptcy will generally discharge your unsecured debts, such as credit card debt, medical bills and unsecured personal loans. The court will discharge these debts at the end of the process, generally about four to six months after you start.
Some types of unsecured debts usually aren’t discharged through a Chapter 7 bankruptcy, including:
- Child support
- Alimony
- Student loans
- Some tax debt
- Homeowners association fees
- Court fees and penalties
- Personal injury debts you owe due to an accident while you were intoxicated
- Unsecured debts that you intentionally left off your filing
Your creditor could also object and keep certain debts from getting discharged. For example, a credit card company could object to the debt from recent luxury goods purchases or cash advances, and the court may decide you still need to repay this portion of the credit card’s balance.
Additionally, a Chapter 7 bankruptcy may discharge the debt you owe on secured loans. Secured loans are those backed by collateral, such as your home for a mortgage, or when a creditor has a lien on your property. However, even if the debt is discharged, the creditor may still have the right to foreclose on or repossess your property.
If you file for Chapter 7 bankruptcy, you may lose your nonexempt belongings, property that has a lien on it and property you offered as collateral for a loan.
Examples of exempt property based on current federal limits for an individual include:
- A homestead exemption of $25,150
- Up to $4,000 on a vehicle
- Up to $1,700 in jewelry
- Up to $13,400 in personal property, such as books, household items, and clothes (there’s a $625 per-item limit)
- Funds in tax-exempt retirement accounts, such as a 401(k) or 403(b) accounts, and up to $1,362,800 in combined savings in IRAs and Roth IRAs
- Public benefits, such as Social Security, veterans benefits and unemployment
- Up to $2,525 in books and tools of trade
- Alimony and child support
- Certain insurance benefits
- An additional $1,325 in property of your choice, plus up to $12,575 of unused funds from your homestead exemption
Double these amounts if you’re married and file a joint tax return. Keep in mind that states may have different exemptions and limits that you can (or must) use when filing bankruptcy. For example, the homestead exemption for a single homeowner living in California starts at $75,000, but is unlimited in some other states.
A trustee can’t take property when its value is less than the exempt amount, which means you may be able to keep your home and vehicle.
For example, if your house is worth $400,000 and you still owe the lender $350,000, you have $50,000 worth of equity in the home. If your state has a homestead exemption higher than the $50,000 of equity you have, then the trustee can’t take your home. But if your homestead exemption is $25,150, the trustee could take and sell your home, pay off your mortgage, give you the $25,150 exempt amount and use any remaining funds to repay other creditors.
A similar scenario could play out with other forms of secured debts, such as an auto loan. However, just because the trustee can’t take and sell these assets doesn’t mean you’ll get to keep them in the long run.
When you’re behind on your payments, your creditors can still foreclose on your home or repossess your vehicle once you complete the bankruptcy process. If you want to keep possessions that are securing your debts, you may have to continue making payments on the loan (if you’re not already behind) or pay the full price to purchase the item.
Generally, the entire Chapter 7 process from the initial credit counseling to the point when the court discharges your remaining debts takes about four to six months.
Your case could take longer, however, such as when the trustee asks you to submit additional documents or if they have to sell your property to repay creditors. Or, perhaps you want to try to get your student loans discharged in bankruptcy. It’s possible, but difficult, and can require a lengthy trial.
Generally, the entire Chapter 7 process from the initial credit counseling to the point when the court discharges your remaining debts takes about four to six months.
Your case could take longer, however, such as when the trustee asks you to submit additional documents or if they have to sell your property to repay creditors. Or, perhaps you want to try to get your student loans discharged in bankruptcy. It’s possible, but difficult, and can require a lengthy trial.
Upon filing, a Chapter 7 Trustee is appointed to oversee the case. One of the Trustee’s jobs is to preside over the creditor’s meeting. The creditor’s meeting takes place approximately 30 days after the bankruptcy case is filed. That meeting is open to creditors and parties in interest who have a limited opportunity to examine the individual debtor or the business debtor’s representative. Another job of the Chapter 7 Trustee is to liquidate non-exempt assets of value. If there are no assets to distribute, the Trustee will file a report of no distribution. If there are assets that can be liquidated to make a meaningful distribution to creditors, the Trustee will notify creditors who will then have the opportunity to file claims and participate in a distribution.
An Oak Park Legal attorney will prepare and file your bankruptcy petition with the court, answer your pre-filing questions and post filing questions up through your discharge date, attend your 341 trustee meeting with you which is currently done over a phone conference and provide required financial documents to trustee as well as coordinate with the bankruptcy trustee if additional information is requested.
A flat fee for legal services will be quoted to you during your free initial consultation depending on the facts of your case. There is a court filing fee of $338, credit counseling fee of $25-$50, and a credit report fee of $37-$74 depending on whether you are single or married which is an additional cost to the flat fee legal fee that we quote you. The legal and credit report fees are due prior to us filing your case, however $235 of the court filing fee may be paid in installments with the bankruptcy court post filing. You may also choose to retain us by putting $100 down and make payments towards filing your bankruptcy which will stop creditor phone calls, however we cannot file your case until the full fee is paid, otherwise our fee would be discharged in your case as well.
In most cases you will only be required to go to court one time to meet with a trustee who will question you about your financial affairs and items listed in your bankruptcy petition. This meeting usually occurs in about 30 days from your bankruptcy filing date. The meeting will be held in the county where you live. Since the Covid-19 Pandemic all initial 341 court meetings have been held telephonically and are expected to continue that way into the future.
Yes, a chapter 7 bankruptcy will stop your garnishment after a bankruptcy attorney files your case and notifies your employer. If your wages have been garnished within 90 days of your case filing, you may be able to get those funds back after your case is filed so long as the funds are exempt.
There is no set amount that a debtor must have in order to file bankruptcy, however this office advises debtors have at least $10,000 in debt in order to avoid any bankruptcy abuse actions from the trustees office or to make the bankruptcy filing worthwhile. If you feel that you can repay your debt in the future then it is possible that debt settlement may be a better route for you.
Filing chapter 7 bankruptcy may only delay the foreclosure process and in most cases does not allow a debtor to catch up on missed payments. A secured creditor may file a motion for relief from the automatic stay and continue the foreclosure action when the motion is approved or after you have received your discharge. Additionally a bankruptcy trustee may seek to work out a short sale or a carve out with the bank if they sell your property, so chapter 7 bankruptcy is not advisable if you are behind on your mortgage payments if you are seeking to retain real estate.