Understanding Chapter 7 Bankruptcy
If you have already done everything you can to pay off your debts but still seem to be stuck, it might be time to consider Chapter 7 bankruptcy. With the help of a bankruptcy trustee who will oversee the process, this type of bankruptcy case can discharge some or all of your debts.
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While it comes with grave consequences, it might be the best next option for you to explore on your quest for debt relief.
Bankruptcy law is complex, but it’s important to become familiar with it if it’s something you are considering. In the following sections, we will discuss the ins and outs of Chapter 7 bankruptcy filing so that you can make the decision that is best for you and your financial well-being.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a process, otherwise known as a straight bankruptcy or liquidation bankruptcy, that absolves individuals from their unsecured debts by clearing either a portion or all of what is owed.
Qualifying applicants of Chapter 7 bankruptcy will be appointed a bankruptcy trustee and might be able to have several types of debts discharged including credit card debt and medical bills, but usually excluding liabilities such as child support, student loans, and tax debt.
If you feel helpless because your debts are backing you into a corner, filing for Chapter 7 bankruptcy is a way to wipe the slate clean and. However, it’s important to be aware of the severe repercussions such as possibly losing your assets and having it take a big toll on your credit report.
How to know if you should pursue chapter 7 bankruptcy
If you find yourself backed into a corner by credit card debt, personal loans, and other unsecured debts and have already exhausted all of your options, then it might be time to file for bankruptcy as a last resort.
Think of this bankruptcy process as a hard-reset button that puts some of your debts on hold. In fact, in many cases, creditors will usually refrain from collecting from you once you file.
Unfortunately, there is no way around it—Chapter 7 bankruptcy usually leads to the debtor losing some of their assets. The property at stake is going to depend on what state you live in, as every state has different laws regarding what are considered exempt and non-exempt assets. For example, in some states, your 401(k) could be considered exempt (can’t be taken) and in other states, nonexempt (can be taken). When it comes to secured debts, filing for bankruptcy can untie you from your obligation to pay them back, but it can’t stop creditors from taking away the property that is securing the debt.
If you are worried about what losses you will face if you move forward with filing your bankruptcy case, meet with a lawyer who can break it down for you.
How to file
Although it is not required that you have an attorney, getting professional advice from a bankruptcy lawyer is strongly recommended to make sure you are headed in the right direction.
Bankruptcy filing isn’t exactly a speedy process and you’ll need to go through a bankruptcy court and be assigned a trustee. A bankruptcy case usually takes between 80 to 100 days from the day you file to the date when your debts get discharged.
These are the things that you will need to do during the Chapter 7 bankruptcy filing process:
- Go through bankruptcy counseling within 180 days before the date you file. Click here to see a list of approved agencies.
- Take a “means test.” This will assess your income and determine whether or not you qualify to file for Chapter 7 bankruptcy based on the amount of money you make and your state’s standards.
- File a petition through your local bankruptcy court. To file a bankruptcy petition, you should expect to fork out a filing fee of up to several hundred dollars. You will also need to provide the court with tax returns and information regarding your expenses and monthly income.
- Take part in a “Meeting of Creditors.” During this creditor meeting, you will be assigned a bankruptcy trustee to oversee your case. The meeting will consist of you, your bankruptcy trustee and any of your creditors who decide to attend. You will be asked a series of questions regarding your current financial situation and will need to answer under oath.
- Take a financial management course. Completion of this course is required within 60 days of the initial date set for the creditor meeting. Click here to find an approved agency.
Once you’ve completed all of the steps in your bankruptcy case, you should receive discharge for your debts. This will permanently absolve you from being responsible for any of the debts that you filed for in the bankruptcy.
The downsides of Chapter 7 bankruptcy
As we’ve discussed throughout this article, filing for bankruptcy comes with a price and it’s important to be aware of the drawbacks before following through with filing.
The major pro is that you will essentially have a fresh start, however the cons include:
- It might harm your credit: A bankruptcy is considered a derogatory public record as far as credit reports go. When this information shows up on your credit report, it could severely hinder your chances of getting approved for a new loan.
- You might get liens placed against your property: In this situation, a lien is when your lender takes partial or full possession of your property. In the event that your property is sold, your lender can pocket the earnings.
- You could lose your property: Your non-exempt property might be compromised in order to pay off the debts you owe to your creditors.
How Chapter 7 bankruptcy affects your credit
A damaged credit score is a dreaded fear for many of us, and unfortunately, it’s one of the biggest pitfalls of filing for Chapter 7 bankruptcy. In fact, out of most other financial occurrences, it’s one of the heaviest hits our credit scores can take.
While this is true, there is no telling exactly how many points it will cost you. The amount of points you lose will depend on your current situation such as what your credit score is now, and other factors having to do with your finances.
A Chapter 7 bankruptcy can typically show up on your credit report for as long as 10 years. During this time, you still may be able to get approved for new lines of credit, however you’ll likely be looking at significantly higher interest rates and additional fees.
If this is the situation that you are currently in or soon to be facing, it’s important that you don’t get discouraged. While filing for bankruptcy might seem like the end of the world for your credit, it is most certainly not. Credit can always be rebuilt. Just be sure to stay on top of your financial health by paying bills on time, managing your credit card balances responsibly, and not applying for too many new loans or credit all at once.
Alternatives to Chapter 7 bankruptcy
If you are drowning in debts and considering filing Chapter 7 bankruptcy but still aren’t sure if it’s the right choice for you, it’s time to look at other options. Is Chapter 7 bankruptcy really your only option left or are you just looking for the quickest way out?
Some debt situations are still salvageable, and a plan of action that doesn’t involve bankruptcy might just be your best bet.
Here are some things you can do before filing Chapter 7 bankruptcy:
- Put an end to harassment from creditors: Most of us have been contacted by a creditor at one point or another, but sometimes these phone calls cross over the fine line to harassment. When the pressure becomes too hard to handle, it might be tempting to jump ship into bankruptcy. But if this is your biggest concern, then it probably isn’t the best way to handle the situation. Fortunately, we have federal and state debt collection laws that protect us from being abused and harassed by debt collectors. Use these laws to your advantage and put a stop to it.
- Negotiate: Contact your secured or unsecured creditors and try to work something out in the case of your. In some cases, creditors might be willing to settle your debts for an amount smaller than what you originally owed. Also, if you have any assets you might be willing to sell, consider this as an option as well. Communication is key, and while negotiating won’t get rid of your debts, it will definitely buy you some time to come up with a plan.
- Seek out help from a credit counseling agency: Negotiating with creditors can be a seemingly intimidating process. If the thought of working out a deal with them on your own is causing you some anxiety, it’s time to consider getting some help from a credit counseling agency. It’s the credit counseling agency’s job to help you repay your debts and get back on your feet financially. Take a look at the United States Trustee website to find a Trustee-approved agency nearest you.
- Don’t do anything: It might sound strange, but there are some cases in which you might be considered “judgment proof.” As long as you are living well within your means and don’t have a lot of property and assets in your name, you could be safe from collectors who try to take you to court on account of your debts. In other words, if you ever get sued, they won’t be able to collect from you because by law, you don’t have anything that they can take from you. Creditors are legally unable to take away anything that supports your basic needs nor are they able to revoke your rights to unemployment benefits or public assistance benefits.
Chapter 7 bankruptcy is a serious legal process that takes a while to complete and comes with a lot of drawbacks. However, if your debts are piling up and you have nowhere to turn, filing a case with your local bankruptcy court can help you get the fresh start that you need.
If you decide that this is the best option for your financial situation, a bankruptcy trustee will oversee your court case, but its best to get a lawyer to help you, but it’s not required. Do your research and explore your other options before deciding to follow.
Remember—filing for bankruptcy has a lot of pitfalls, but it won’t be the end of the world. There is always time to recover.