Chapter 7 bankruptcy, also known as ‘liquidation bankruptcy’ or ‘straight bankruptcy,’ is what most people probably imagine when they visualize bankruptcy. It is the kind of bankruptcy that provides relief from debt by clearing out most of the unsecured debts, thus giving debtors an opportunity to get their finances in order.
It gives one a second chance at regaining financial control by having your unsecured debts discharged by a bankruptcy court. However, not everyone qualifies for Chapter 7 bankruptcy as there are specific eligibility requirements that you must meet to qualify to file for a Chapter 7 bankruptcy petition.
However, there are other bankruptcy chapters, namely Chapters 11 and 13. If you’re curious about what Chapter 13 is, you can watch this video:
But for this article, we discuss how Chapter 7 bankruptcy works and how you can qualify for it.
Table of Contents
How Does Chapter 7 Work?
You might mistakenly think of Chapter 7 as one big yard sale to pay off creditors. That is not the situation, as modern bankruptcy law exempts property that it considers necessities of life to help you get back on your feet again.
Filing for a Chapter 7 bankruptcy will impact your credit score for up to 10 years. However, your credit score can improve if you maintain good credit habits. You must note, however, that the record of your bankruptcy filing will be present to financial institutions.
Some of your assets will be used to repay creditors with Chapter 7 bankruptcy, but there are assets that you will be legally allowed to keep. You may wonder, ‘What property can I protect in bankruptcy?’
The exempt property will differ between states, although daily necessities are often included. Here are some examples of what properties can be exempted from liquidation:
- Necessary clothing
- Necessary household appliances, goods, and furnishing
- Public benefits such as welfare
- Unemployment compensation
- Necessary tools or belongings relevant to the person’s trade
- Damages awarded for personal injury
- Pensions
- Motor vehicles
When filing for a Chapter 7 bankruptcy, you must understand how dischargeable debts work. These are debts that can be eliminated; thus, you are no longer liable for them. Furthermore, if the court rules these debts to be discharged, collection agencies can no longer collect loan repayments from you.
It’s ultimately up to the bankruptcy court which of your debts will be discharged. However, here are common dischargeable debts under Chapter 7:
- Credit card balances
- Medical bills
- Mortgage loans
- Automobile loans
- Personal loans
- Utility bills
- Government program overpayments (Social Security and veterans assistance)
These are the kind of unsecured debts you can wipe out, but they all vary on a case-to-case basis. The non-dischargeable debts under a Chapter 7 proceeding include the following:
- Alimony
- Child support
- Student loans
- Personal injury debts
- Specific federal or state taxes
- Court fines or penalties
How Do You Qualify For Chapter 7 Bankruptcy?
Applicants must clear the following hurdles before filing for bankruptcy for the court to approve.
1. Previous Bankruptcy Filings
If you had already filed for a Chapter 7 bankruptcy before and got a discharge, you can only file again after eight years. However, if you filed and didn’t complete the process and never got a discharge, you can file again at any time as long as the court did not bar you from doing so.
If you filed for and received a discharge in a Chapter 13 case, you could only file for Chapter 7 after six years. If you didn’t complete and never got a discharge, you can file at any time as long as you qualify for Chapter 7.
2. Prebankruptcy Credit Counseling
You must complete a credit counseling course conducted at a pre-approved organization. This is required to allow each applicant to understand the responsibilities and consequences of a Chapter 7 bankruptcy.
You need to complete the course within six months before filing for bankruptcy. Upon completing the course, you will receive a certificate of attendance that you must file with the court. You will also be required to attend and complete a debtor’s education course once you file your case.
3. Passing The Means Test
You must pass the means test to qualify for a Chapter 7 bankruptcy. This test has two steps. The first is to determine if your monthly income is less than the median income in your state. You’ll automatically qualify if your monthly income is less than the median.
However, your overall financial status will be analyzed if it is more than your state’s median income. This is done by examining your financial records, including expenses, income, out-of-pocket healthcare costs, and unsecured and secured debts.
This part of the test deducts your expenditure from your income and determines whether there is sufficient remaining income to repay creditors. After deducting all your allowable expenses from your earnings and there is little or no disposable income left, you can receive a Chapter 7 bankruptcy discharge.
Final Thought
While all this might seem simple enough, it is only easy to determine your chances of qualification if you work with an experienced bankruptcy attorney.
Filing for Chapter 7 bankruptcy is a long and tedious process that requires an expert who knows its intricacies. However, it is essential if you need to file a Chapter 7 bankruptcy to get your finances back on track.
