Chapter 7 Bankruptcy

Chapter 7 bankruptcy grants filers a complete discharge of their eligible unsecured debts. A typical Chapter 7 case moves through the courts quickly: filers can generally expect a discharge within four to six months. Here’s a look some basic information on Chapter 7 bankruptcy.

Which Debts Can Chapter 7 Bankruptcy Discharge?

When a debt is discharged, it is legally forgiven. To be discharged in Chapter 7 bankruptcy, a debt must be unsecured (not linked to property) and non-priority. Some examples of dischargeable debts include:

  • Credit card bills;
  • Medical debts;
  • Payday loan debts; and
  • Utility bills.

Certain unsecured debts cannot be discharged in Chapter 7 bankruptcy. These are considered high-priority debts and filing for bankruptcy cannot eliminate them. However, the discharge of other debts may free up enough of a filer’s income to be able to afford payments. Non-dischargeable debts include:

  • Child support payments;
  • Alimony;
  • DUI and other criminal fines;
  • Court fees;
  • Certain tax debts; and
  • Student loans.

 

How Does Chapter 7 Bankruptcy Work?

Filing a Chapter 7 bankruptcy petition with the court begins a debt-elimination process that is intended to offer filers a chance to start over financially. It works like this:

  • The bankruptcy petition: This is the form filers submit with the court. It includes information on a filer’s income, assets, debts and expenses. By submitting this paperwork, the filer is asking the court for a discharge of the debts indicated.
  • Creditor notification: Each creditor listed in the petition is sent notice that the filer has applied for bankruptcy. The creditors have a chance to oppose the discharge of any debts listed.
  • The statement of intention: This is a document filers must submit to the court shortly after the initial paperwork. In it, a filer identifies his or her plans for secured debts (like cars and houses). Filers can choose to redeem the debts (by paying the remainder of the balance due in a lump sum), renew the debts (by committing to continuing to make payments) or surrender the property and eliminating the debt connected to it.
  • The creditors meeting: At this meeting, creditors can (but often don’t) attend to contest a debt. Filers must attend and testify that all the information in their petition is complete and accurate.
  • Liquidation of assets. In some Chapter 7 cases, filers own property that is not protected by state or federal exemptions. Any unprotected property can be sold as part of the bankruptcy process. Proceeds from the sale are divided among creditors as designated by the court.
  • The financial management course. In order to be eligible for a bankruptcy discharge, all filers must complete a financial management (also called “debtor education”) course with an approved organization. This course is designed to equip filers with the financial management skills they need to rebuild their finances in their lives after bankruptcy.
  • The debt discharge: After a certain period of time has passed, the court can grant a debt discharge to filers whose cases have no problems.

Exemptions in Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often recommended for those with little or no non-exempt property. In other words, Chapter 7 tends to work well for those who don’t own much besides what is protected by the court (that is, exempted from the Chapter 7 liquidation sale).

Exemptions vary from state to state, but most states include exemptions for:

  • A homestead, which can mean equity in a house up to a certain dollar amount;
  • A vehicle;
  • Work tools;
  • Clothing, dishes, household goods and other everyday needs; and
  • Books.

Many states offer a “wildcard” exemption that filers can apply to any item not specifically listed. Some states offer an exemption for a small amount of cash savings.

The important thing to remember is that Chapter 7 bankruptcy is designed to let filers start over without debt. It is not intended to strip filers of their belongings and leave them without any reasonable way to earn a living.

Who Can File for Chapter 7 Bankruptcy?

A person is generally eligible to file under Chapter 7 of the U.S. Bankruptcy Code when he or she has passed Chapter 7 means test, not received a Chapter 7 discharge in the last eight years, and didn’t have a bankruptcy petition dismissed for reasons such as failure to appear or a voluntary dismissal, in the previous 180 days . Anyone interested in learning more about Chapter 7 bankruptcy can consult with a bankruptcy lawyer.

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