Chapter 7 bankruptcy is purposed to bring debt relief to individuals, whose income and amount of debt does not allow them to pay loans back now or in the future (hopeless debt).
The person with an unbearable burden of debts has a right to file for bankruptcy if he/she matches several key criteria. Chapter 7 (also called liquidation bankruptcy) has number of advantages that makes this chapter the most popular in the USA. The process of filing for bankruptcy under this chapter is very fast (comparing to other chapters) and lasts about 3-6 months.
Bankruptcy under Chapter 7 allows a person keep a lot of their possessions without having a need to sell it forcibly. Like every other chapter, Chapter 7 implies debt relief for only non-secured loans. If you have secured loan which becomes unbearable, you may just give up your collateral (a house, a car, or anything which were used to secure the loan) and you are free from this particular debt.
Let’s take a closer look at key aspects of filing for bankruptcy under the Chapter 7.
Chapter 7. Eligibility
It’s easy to find out whether you are eligible for Chapter 7. First of all, Chapter 7 is available only for individuals, and not for companies or partnerships. There is a special test called Means test that you have to pass successfully.
The Means test includes calculations of your median income. If, after passing the test, it will turn out that your income is enough to pay at least a certain part of your debt, you are not eligible for Chapter 7. Instead, you will be offered to file for Chapter 13.
If you have had a debt relief previously under the Chapter 7, you are not allowed to file for liquidation bankruptcy earlier than 8 (or 6) years after the last bankruptcy. If you will decide to file for Chapter 13 after the previous debt discharge under the Chapter 7, you will have to wait for 6 years after the last bankruptcy.
Who does not qualify for Chapter 7?
- You are not allowed to file for this chapter if you have already filed for it and received approval and the period between your previous debt discharge and current moment is less than 8 years.
- You will also not qualify if the judge will find out (or even suspect) you are lying to your creditors concerning your income.
- You will not qualify if you have received a bankruptcy refusal during the last 6 months. The things will go worse if your bankruptcy was dismissed due to the previous fraudulent filing.
- You will definitely get a refusal if they will discover you have tried to hide some of your assets from listing in bankruptcy papers. If it will be found out that you have tried (successfully or unsuccessfully) to unload your valuable assets to your relatives or a spouse with the purpose to save assets from withdrawal by the bankruptcy court, you will face really serious consequences.
- You will not qualify is your debt ceiling exceeds requirements and your regular median income is enough to file for Chapter 13.
Benefits and flaws of filing for Chapter 7
Chapter 7 is the easiest to file for and the fastest in terms of the time the whole process will take. Here are the main pros and cons of Chapter 7.
- Chapter 7 allows strict and immediate debts liquidation without long and stressful process.
- The court order about your bankrupt status will instantly stop all actions on the side of collectors.
- The record about your bankruptcy will stay in public documents only for 6 years.
- You will be cleared of your financial obligations without a need to make debt reorganization plan.
- You will be allowed to keep your exempt property like furniture, an inexpensive car, clothing, and other necessities.
- Despite your credit score is too low to get a bank loan after the bankruptcy, you will still be able to find online lenders who are willing to give you money.
- After three years (in some cases 1 year) after your bankruptcy, you will be able to get a new credit line.
- Your non-exempt assets will be withdrawn and sold by a Trustee in a favor of your creditors.
- All your credit cards will be taken off and you will be restricted from the chance to use any borrowed money.
- You will have to spend about half a year on the bankruptcy process.
- As your home (if any) will be withdrawn you will only be able to rent an apartment, as after the bankruptcy it will be almost impossible to get a home loan.
- Chapter 7 does not write off such obligations as child support or alimony.
- In a case of a Chapter 7 bankruptcy dismissal, you will be allowed to file for this chapter once again only in 180 days after your current filing.
How to file for Chapter 7
First of all, you will need to visit the website of the U.S. court and download the forms. After filling the forms you will need to pass the Means test where your median income will be calculated. Based on the results of this test it will be clear whether you qualify for Chapter 7.
After having the papers done and sent to the court you will be given a Trustee who will manage the process of your assets exemption.
After that, the Trustee will arrange a meeting of creditors where all your creditors will be presented. You will be asked questions about your financial situation and debts, and after the meeting (if successful), you will receive the court order. If during the process, the judge will find out that your income does not allow you to qualify for Chapter 7, your case may automatically be converted into Chapter 13.
Alternatives to Chapter 7
The most common alternative to Chapter 7 is Chapter 13 where instead of debts liquidation you will receive the right to repay your debts within 3-5 years with lower interest rate.
However, Chapter 13 requires much more efforts, time, and money. The court fee is higher significantly and you will need to create a professional debt reorganization plan to have it approved by your creditors and the court. Chapter 13 allows you to keep all assets you have, besides, you will be leading your regular lifestyle without going bankrupt. Though, you will still have to manage to find the money for your loans repayment.