The Bankruptcy Code provides different options for individuals and businesses struggling to pay their debt, including court-supervised payment plans. Many debtors, particularly those with limited income and few assets, are eligible to wipe out much (or all) of their debt rather than making a payment plan. That option is known as “debt liquidation” and is available under Chapter 7 of the Bankruptcy Code. Chapter 7 is intended to give a fresh start to people who have no realistic opportunity to pay their debts.
What are the benefits of a chapter 7 bankruptcy?
Unlike chapter 11 (business reorganization) or chapter 13 (individual repayment plans), chapter 7 completely eliminates certain kinds of debt. After the bankruptcy procedures are completed, the bankruptcy court grants the debtor a “discharge” of those debts. In other words, the debtor has no obligation to pay those debts and the creditor no longer has the right to ask the debtor for payment.
An immediate benefit of a chapter 7 bankruptcy is the “automatic stay” that takes effect as soon as the bankruptcy petition is filed with the court. The stay prevents creditors from collecting their debts while the bankruptcy is pending. The creditor can no longer send threatening letters to the debtor or make harassing telephone calls. If the debt has been referred to a collection agency, the collection agency must cease its efforts to collect the debt. The creditor cannot file a lawsuit to collect the debt and any lawsuit that has already been filed (including foreclosure and repossession) must be put on hold until the bankruptcy court takes further action.
What debts that can be discharged in a chapter 7 bankruptcy?
Most unsecured debts can be discharged. There are exceptions to that rule, including most taxes, judgments for damages resulting from drunk driving accidents, alimony and child support arrearages, and student loans. Secured debts (those that are protected by security, like a mortgage or deed of trust on a house, a lien on a car, or a pledge of collateral), but chapter 7 provides options for dealing with secured debts. You may be able to:
- surrender the property to your creditor;
- negotiate a new payment schedule; or
- keep the property by paying its current value to the creditor.
What happens to property in a chapter 7 bankruptcy?
Debtors can usually keep most or all of their unsecured property after a chapter 7 discharge is granted. See Can I Keep my Home and/or Car after Filing Bankruptcy for more information.
Who is eligible for a chapter 7 bankruptcy?
Chapter 7 bankruptcy relief is available to both business and individual debtors. An individual’s eligibility to file bankruptcy under chapter 7 is determined by a “means test.” If the debtor’s current monthly income is lower than the state median income for a household of the same size, the debtor is eligible. If the debtor’s current monthly income exceeds the state median income, the debtor must perform additional calculations to determine whether he or she has enough income to repay at least a portion of the debt. A bankruptcy attorney can perform those calculations and can advise debtors who are not eligible for a chapter 7 bankruptcy about other bankruptcy options.
What must a debtor do before filing a chapter 7 bankruptcy?
To file a Chapter 7 bankruptcy you must file a Petition for Bankruptcy accompanied by other information you must provide:
- A full list of creditors, along with their claim types and amount;
- The source, amount and frequency of your income;
- A list of all of your property;
- A detailed list of monthly living expenses, including food, shelter, utilities, taxes, medicine, transportation and clothing.
If you are married, you and your spouse must both file financial information with the Petition so the court, the Trustee and the creditors can have a complete picture of the household’s financial situation. This is true regardless of the type of Petition filed: joint petition, separate petitions or if just one spouse if filing a petition.
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Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.