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Chapter 7 Bankruptcy: The Facts

What Types of Debt Are Eliminated in Chapter 7?

Chapter 7 bankruptcy is a powerful tool designed to:

  • Eliminate certain unsecured debt (debt not tied to property), including:
    • credit cards
    • medical bills
    • payday loans
    • utility bills
    • some personal loans
    • some tax debt
    • department store cards
    • some signature loans
  • Stop creditor harassment
  • Stop lawsuits and wage garnishments
  • Allow many filers keep their car(s) and other possessions
  • Eliminate debt in (usually) just a few months

Millions of Americans turn to Chapter 7 bankruptcy every year. It may help you resolve your debt once and for all.

A bankruptcy attorney can help determine your Chapter 7 eligibility and whether Chapter 7 is right for you. Receive a free, no-obligation consultation by a local attorney today:

How Long Is The Process?

Chapter 7 bankruptcy cases typically move relatively quickly and you may receive your discharge in just a few months.

A Chapter 7 debt discharge will generally eliminate certain types of unsecured debts like credit card debt, medical bills, and most personal loans.

Chapter 7 bankruptcy could lead to a complete discharge of your credit card debt. Learn how by speaking with a local bankruptcy attorney.

Check out this handy Chapter 7 Bankruptcy Timeline Tool that can help walk you through the Chapter 7 bankruptcy process.

Can You File? The Chapter 7 Means Test

Before filing bankruptcy, your eligibility will be determined through the means test.

Although there was a lot of media hype about the Chapter 7 bankruptcy means test disqualifying people from filing for Chapter 7 bankruptcy when it was introduced in 2005, the truth is that most Chapter 7 petitioners still qualify.

The Chapter 7 means test is a two-step process which begins with a median income comparison.

Explaining this first step of the Chapter 7 bankruptcy means test in more detail, your monthly income is compared to the median income in your state for a family that is the same size as yours.

If your income is at or below the median income, you generally qualify for Chapter 7 bankruptcy. If your income is higher than the median income, it doesn't mean that you can't file for Chapter 7 bankruptcy, but rather triggers the second step of the Chapter 7 bankruptcy means test.

Calculating disposable income and unsecured debts is the second step of the Chapter 7 means test. Generally speaking, if your disposable income over the next five years is less than $6,000 ($100/month), you'll probably "pass" the Chapter 7 bankruptcy means test and may be eligible to file Chapter 7.

If your disposable income during that five year period is greater than $6,000 but less than $10,000, you may still be able to file for Chapter 7 bankruptcy protection, depending upon your allowed expenses

A local bankruptcy lawyer can further explain how disposable income is calculated.


Should I File Bankruptcy?

We know it's not an easy decision to file for bankruptcy protection, but it has helped hundreds of thousands of people get out of debt. It's a good idea to talk to a bankruptcy lawyer about your specific financial situation before you decide to file. Typically, Chapter 7 bankruptcy has been an option for people who:
  • Have low or no income
  • Have lots of credit card debt or medical bills
  • Have little or no money left after paying necessary living expenses each month
  • Rent or have little equity in their home
  • Have bad credit and are looking for a fresh start

Chapter 7 bankruptcy is often referred to as liquidation bankruptcy because a bankruptcy trustee can liquidate (sell) non-exempt assets to pay part of your outstanding bills.

But the term liquidation can be misleading since many people filing Chapter 7 don't have any non-exempt assets, meaning there's no actual liquidation.

Pre-Filing Credit Counseling Briefing

The law requires that you receive a Credit Counseling Briefing from a certified credit counseling agency before filing bankruptcy, regardless of whether you're filing Chapter 7 vs Chapter 13 bankruptcy.

The agency will explain financial management and how to do a budget analysis and will also discuss alternatives to filing bankruptcy.

Although there are some exceptions to this rule, most debtors will have to get this briefing. Failing to do so before filing may result in your bankruptcy case being dismissed.

Your Chapter 7 bankruptcy lawyer can refer you to an appropriate agency.

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The Role of the Bankruptcy Lawyer

If you decide to file Chapter 7 bankruptcy, you will first have to complete your credit counseling session and then provide all of the necessary information to your Chapter 7 bankruptcy lawyer, who will review your situation and prepare a bankruptcy petition.

You will have to list personal information, including all of your income, assets, expenses and debts on your bankruptcy petition and any related forms and schedules. You will also have to include any applicable exemptions to which you're entitled.

How important is it to disclose all of your debts when seeking to file for Chapter 7 bankruptcy? Whether failing to list certain debts is an honest mistake or a deliberate action, bankruptcy fraud is a serious offense that can result in prosecution. Bankruptcy lawyers can help prevent bankruptcy fraud.

Next, your bankruptcy attorney files the petition in local bankruptcy court, which will appoint a bankruptcy trustee to your case.

After filing bankruptcy your bankruptcy petition with the court, an "Automatic Stay" is entered in most cases to prevent creditors from taking any further action against you on the debts included in your filing outside of bankruptcy court. This may mean an end to the harassing creditor calls, repossessions, or wage garnishments during your case.

Your Role in Your Chapter 7 Case

Be sure to follow your attorney's advice and do not attempt to conceal your property, destroy any financial records, violate any court order or make big last-minute charges on your credit cards prior to filing bankruptcy.

Please note that you may only file for Chapter 7 bankruptcy once in eight years. Understanding the Chapter 7 bankruptcy timeline can be critical to making good decisions for your financial future.

Bankruptcy Exemptions: Protect Property from Creditors

Exemptions protect certain property from liquidation in bankruptcy. The specifics vary from state to state.

Exemptions typically include the primary residence, tools, work equipment, vehicle, certain items of personal property and numerous other categories of property.

Your court-appointed bankruptcy trustee can liquidate your non-exempt assets to pay your creditors. However, a trustee will likely only liquidate in most cases if he or she can obtain enough money from a sale to make a significant payment to your creditors.

Talk to one of our sponsoring bankruptcy lawyers today about your state's exemptions.

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Reaffirming Secured Debts

Although Chapter 7 bankruptcy may help eliminate unsecured debts, secured debts are generally not separated from the assets that secure them. That means that if you want your car loan discharged, you'll have to give back the car.

However, if you want to keep your car (or another asset that serves as security for a debt) you may be able to negotiate a reaffirmation agreement with your creditors in Chapter 7 bankruptcy. By reaffirming a debt, you agree to continue making payments in exchange for the right to keep your property.  You can discuss this option with your lawyer.

The Final Step

Before getting your bankruptcy discharge, you must complete an approved Debtor Education Course: a personal financial management course required by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Your bankruptcy lawyer may refer you to an approved Debtor Education Course.

Chapter 7 Bankruptcy Fees

If you're interested in filing for Chapter 7 bankruptcy, you will likely wonder about how much it will cost to do so if you qualify through the Chapter 7 bankruptcy means test.

View current Chapter 7 bankruptcy fees here on our site. (Note that Chapter 7 bankruptcy fees are the filing fees charged by the court and DO NOT include attorneys fees. Fees are subject to changes. For the most current data, ask your bankruptcy lawyer what Chapter 7 would cost you.)

Speak to a Bankruptcy Lawyer Today

Chapter 7 Bankruptcy May Provide a Fresh Start

Filing bankruptcy, whether it's Chapter 7 or Chapter 13, is not a decision that should be undertaken lightly.

However, if you're in a difficult financial situation that just keeps getting worse, filing bankruptcy may be your opportunity to seek broad protection against creditors, regain control of your financial life and rebuild your credit after bankruptcy.

In the event that you do not qualify for Chapter 7 bankruptcy, don't despair -- filing Chapter 13 bankruptcy may still be an option for you.

Don't live another day in financial torment. Take action and control today by talking with one of our sponsoring bankruptcy lawyers about how filing bankruptcy may be able to help with your current financial problems.

The above synopsis of bankruptcy laws is by no means all-inclusive and is not legal advice. These laws may have changed since our last update and there may be additional laws that apply in your situation. For the latest information on these bankruptcy laws, please contact a bankruptcy lawyer in your area.

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