Chapter 7 bankruptcy helps you get rid of debt quickly and affordably and with legal protection from the court. Your unsecured and unmanageable debts like credit cards and medical bills can be discharged. This means you no longer owe the debt - legally. You are able to keep exempt property. Non exempt property will be sold by the court appointed bankruptcy trustee and the funds will be used to pay back the money you owe to your creditors.
It is possible to reconfirm secured debts like your mortgage on your home, or car loan, and continue to pay those. Chapter 7 is the fastest and often most affordable path to debt relief and a financial fresh start. Take a look at the following topics to learn what Chapter 7 bankruptcy is all about.
What is Chapter 7 bankruptcy all about?
Chapter 7 bankruptcy is the legal process where your non-exempt assets are sold by the US trustee to pay back your creditors. The sale proceeds are distributed amongst your creditors and the amounts that remain unpaid are then discharged legally. You are no longer legally obligated to pay any amount of money to the debts that were discharged. Under Chapter 7 bankruptcy, you can get rid of debts within a few months of filing the bankruptcy. Once you start the process of filing for bankruptcy protection, phone calls from creditors and debt collectors will stop as will any other form of collection activity.
Check out the following example to get an idea about how Chapter 7 bankruptcy helps you get rid of debt.
- Sally has 2 Credit card bills, 2 Payday loans and 1 Personal loan:
- Outstanding balance on credit cards - $90,000
- Amount owed on payday loans - $80,000
- Total balance on personal loans - $20,000
- The total debt amount - $190,000
- Sally is unable to repay loans through debt relief programs and decides to file bankruptcy.
- Sally qualifies for Chapter 7 bankruptcy after going through a Means Test.
- The principal amount is lowered, often to zero, under court supervision.
Her non-exempt assets, if she has any, are sold off and the recovered money goes toward the payment of debts.
Sally credit score could drop by 200 to 250 points but she is able to get rid of her debts and start fresh with her finances. After the bankruptcy, Sally can use smart credit rebuilding tools and be able to qualify for auto, home and student loans in as little as 1 to 3 years..
What are the reasons to file Chapter 7 Bankruptcy?
- Normally you are free from unmanageable debts within 3-4 months
- Although you have to give up your non exempt property in Chapter 7 bankruptcy, the process lets you keep most of the necessities. Chapter 7 is often filed in cases where the debtor has no assets to lose.
Who qualifies for Chapter 7?
- A resident of the US.
- A debtor who makes less than the average income for their state.
People who don't have enough disposable income to pay off their debts will be allowed to file a Chapter 7 bankruptcy. Disposable income is the amount of money left over after paying monthly living expenses. The formula for calculating disposable income is called the "means test" and is designed to prevent filers with higher incomes from filing Chapter 7 bankruptcy.
Who doesn't qualify for Chapter 7?
- Those who've been granted discharge by Chapter 7 within the last 8 years.
- Individuals who've had their bankruptcy filings dismissed for cause (eg: there were defects in the bankruptcy case, fraud, etc.) within the last 180 days.
- Debtors who try to hide, transfer or destroy their properties in order to defraud their creditors or the court trustee appointed for the Chapter 7 case.
What are exempt and non-exempt assets in Chapter 7?
In Chapter 7 bankruptcy, you have to hand over certain properties/ assets to the court appointed trustee. The trustee will sell the assets to repay your debts. However, the trustee will not sell all of your personal property. You can keep certain assets. Check out the examples given below to get an idea about the properties you can retain (exempt property) and the assets you may have to give up (non-exempt property):
Non-exempt property include:
- Pricey musical instruments provided the debtor is not a professional musician.
- Family heirlooms.
- Collections of valuable items like stamps and coins.
- Bank accounts, bonds, cash and other investments.
- A second or vacation home.
- A second car or truck.
Exempt property include:
- Household appliances.
- Vehicles, up to a certain value.
- Clothing.
- General household goods and furnishings.
- Jewelry, up to a certain value.
- Pensions and other retirement accounts.
- A part of unpaid but earned wages.
- Equipments (up to a certain value) that are needed in the debtor's profession.
- Damages awarded for personal injury.
- Som or all of the equity in the debtor's home.
- Public benefits, including social.
What kind of debts are discharged in Chapter 7?
Discharge of the debts marks the end of the bankruptcy process. The debtors will receive a Notice of Discharge and will not be permitted to file Chapter 7 bankruptcy again for at least eight years.
| Dischargeable | Non Dischargeable |
|---|---|
| Personal loans | Recent taxes |
| Repossession deficiencies | Child or family support |
| Credit cards | Auto accident claims that involve intoxication |
| Judgments | Trust fund taxes |
| Auto accident claims | Criminal fine or restitution |
| Business debts | Debts not scheduled in the bankruptcy |
| Guaranties | Penalties payable to the government other than tax penalties |
| Leases | Student loans |
| Negligence claims | Debts listed in prior bankruptcy where debtor was denied a discharge |
How does Chapter 7 bankruptcy help debtors?
Chapter 7 can help debtors in the following ways:
Stops collector harassment
you file bankruptcy Chapter 7, the court notifies your creditors and collection agencies about it. The creditors or collectors should no longer contact you. However, if they continue with harassing calls, the creditor may be sanctioned by the court and have to pay your attorney fees.
Stops foreclosure
Chapter 7 filing puts an automatic stay from mortgage foreclosures, until you get a discharge under this Chapter of the bankruptcy process. However, the mortgage lender can apply to the court and request for relief from the automatic stay. You can work out a suitable repayment plan with the lender.
In a Chapter 7 Milwaukee bankruptcy, there are certain exemptions that filers can claim. A portion of the debtors' furniture, personal possessions and home is exempt from the bankruptcy. In some scenarios, the filers may stay in their home.
For instance, Wisconsin Chapter 7 homeowners are allowed $75,000 of exempted equity in their home. This is called a "homestead" exemption. If the debtors' home is worth $100,000 and has a mortgage balance of $75,000, the home's equity equals $25,000. This equity is less than the $75,000 allowed by the bankruptcy court's homestead exemption, which makes this equity exempt from liquidation in the bankruptcy. The debtors can stay in their home. In many instances, a mortgage lender will re-negotiate the home loan and permit the debtors to make payments at the new monthly payment amount and, thereby, stay in their home.
Removes lien
You can get certain liens removed under Chapter 7 bankruptcy if you can get a court order. Under Chapter 7, you can get rid of federal income tax debts only if the following conditions are met:
- No tax lien is recorded against your property by the IRS.
- The tax return must be due for at least 3 years.
- The tax return should have been filed at least 3 years prior to bankruptcy filing.
- There should not be any record of fraudulent activities on your part.
- You should not have records of skipping tax payments.
- You should have received a copy of your tax assessment at least 240 days before filing bankruptcy.
Removes community debts
If you're a divorcee, the court will discharge you from all dischargeable community debts. However, once you're discharged from the community debt, your ex-spouse becomes responsible for the entire balance owed on the account. So, the debt is simply transferred from you to your ex-spouse.
What restrictions does Chapter 7 impose on employers and creditors?
- Under 11 U.S.C. 525, an employer cannot fire a debtor who's filed a bankruptcy, unless the employer is the creditor.
- Arrest for debt has been illegal in the US since the 1830s.
Filing bankruptcy is a serious decision and should be done with a lot of caution. You need to know the basics and get help from an attorney to guide you throughout the process.