Chapter 7 Bankruptcy Basics

When you start looking into filing for bankruptcy you will see various kinds, Chapter 7, Chapter Chapter 9, Chapter 11, Chapter 13 among them. The two kinds that are intended for consumers, regular people who have debts they cannot handle any longer, are Chapters 7 and 13. We will explain Chapter 7 bankruptcy basics so you can decide if Chapter 7 is the best option for you.

Chapter 7 in a Nutshell

Under a Chapter 7 bankruptcy also known as a liquidation bankruptcy, all of your eligible debts are forgiven. Once you have successfully completed the bankruptcy process, you are no longer responsible for those debts and the creditors cannot contact you regarding them.

How Chapter 7 Works

To file for Chapter 7, it is advised to work with a lawyer who specializes in bankruptcy. Yes, you can fill out and file the forms yourself and represent yourself in court but as a layperson, the process can be tricky and if you make a mistake, miss a deadline, or fail to persuade the judge, you risk your case being dismissed.

As part of the process, you will be required to take two classes; one called credit counseling and the other, debtor education. The first is to help you determine if bankruptcy is the right choice for you and explain alternatives. The debtor education class is designed to help people better manage their finances so they do not end up right back where they were before filing.

A trustee will be appointed to oversee your case. He or she is authorized to sell any non-exempt property you own and use the money to pay your creditors. However, most Chapter 7 cases are no-asset cases meaning the filer's personal property is exempt from being sold.

The trustee also organizes the 341 hearing, also known as the meeting of the creditors. At this meeting held at a courthouse, the trustee and creditors (those who choose to attend and most creditors do not attend) ask you questions that you must answer under oath.

In the final step of the process, the court will discharge your remaining eligible debts and it is over. From start to finish, going through Chapter 7 takes between four and six months.

Who is Eligible for Chapter 7?

Chapter 7 is means-tested. Your average monthly income for the six-months leading up to your decision to file bankruptcy is compared to the median income of a similarly sized household in your state. If your income is below the median, you will qualify.

There is no minimum or maximum amount of debt you need to have to file for Chapter 7.

How Much Does Chapter 7 Cost?

The fee to file for Chapter 7 is $335. The trustee may charge a fee of $15 or $20 when you file as well. If you don’t have the full amount, you can ask for permission to pay it over time. Most courts will permit this if you can prove that paying in full would be a financial hardship for you.

The required courses cost from $20 to $100 depending on where you file. The cost of a bankruptcy lawyer varies widely according to location and experience among other factors but a good estimate is to expect to pay somewhere between $500 and $3,500.

What Debts are Discharged Under Chapter 7?

Many unsecured debts (those not backed by collateral) are discharged under Chapter 7. Those debts include:

• Credit cards
• Medical bills
• Collection agency debts
• Personal loans 
• Past-due utility bills
• Bounced checks (unless fraudulent)
• Past due rent
• Business debts

What Debts are Not Discharged Under Chapter 7?

• Student loan debt (unless the borrower can prove extraordinary hardship which almost never happens)
• Some tax debts
• Spousal and child support
• Government levied fines and penalties
• Personal injury debts caused by a drunk driving crash
• HOA fees
• Attorney’s fees for child support and custody cases
• Court levied fines and penalties including criminal restitution

Some debts may also not be discharged if a creditor objects. Typical reasons for such an objection include:

• Luxury goods charged on a credit card. If you charge a single item costing more than $725 within 90 days of filing, the debt can be considered fraudulent. 
• Cash advances taken against a credit card. If you take an advance of more than $1,000 from one card within 70 days of filing,  the debt can be considered fraudulent. 
• Debts incurred by fraud or false pretenses. This generally means lying about income on credit applications or buying goods or services with no intention of paying for them.  
• Debts incurred due to willful and malicious injury to a person or property.
  

Chapter 7: Pretty Straightforward!

The other types of bankruptcy, including Chapter 13, are more (sometimes a lot more) complicated than Chapter 7. Chapter 7 is a pretty straightforward type of bankruptcy and usually the best choice for those who have unsecured debts that they are struggling to pay. You have a better understanding of the process now so there is no need to be intimidated. The longer you wait, the longer you live with the stress of having these financial burdens.