Saginaw Bankruptcy Blog


Chapter 7 Bankruptcy Basics

February 23, 2017

The most common form of bankruptcy in the U.S. is Chapter 7, also known as a “fresh start.” A successful filing of Chapter 7 bankruptcy allows debtors to discharge the majority of their debt while protecting their most significant assets. Filing for Chapter 7 bankruptcy can be a complicated, time-consuming process so a bankruptcy attorney is highly recommended to guide you through the process. Below is some basic information to help you decide if Chapter 7 bankruptcy is the right choice for you.


Am I eligible?


The Chapter 7 laws are structured to be available to most people, with certain defined limitations. To qualify, your income must be below a predetermined threshold. If your income is above this threshold, a “means test” will determine whether you are eligible to file for Chapter 7.


What is a “Means Test?”


The means test is used to determine whether you have enough disposable income to repay a portion of your unsecured debts over the next five years. Disposable income is calculated by subtracting your “allowed” monthly expenses—such as rent, food, and transportation—from your total income. If your disposable income is too high to pass the means test, you must file a Chapter 13 instead.


What Else Can Prevent Eligibility?


A previous bankruptcy or dishonesty can also prevent you from filing for Chapter 7. To be eligible, you must wait 8 years from the time of a previous Chapter 7 discharge or 6 years from the time of a previous Chapter 13 discharge. Additionally, you are ineligible if a previous Chapter 7 filing has been dismissed by a judge in the past 180 days under specific circumstances, such as fraud.


What Happens After I File Chapter 7 Bankruptcy?


One of Chapter 7’s most attractive features to debtors is the Automatic Stay. Overwhelming debt is a primary cause of stress in the lives of too many Americans. Worry over repaying what you owe is multiplied by the constant phone calls, letters, and other debt collection tactics. The Automatic Stay prohibits creditors and debt collection agencies from continuing their actions to collect debt from you.


After your filing, creditors are required to follow the procedures defined in the Bankruptcy Code. Creditors will be punished if they continue their debt collection procedures after the automatic stay. You will enjoy peace of mind knowing creditors cannot harass you during the bankruptcy process.


Will All My Debts Be Dissolved After Bankruptcy?


Chapter 7 bankruptcy is designed to give debtors a “fresh start,” so most debts are included. Debts that can be forgiven include credit card debt, medical bills, unsecured and personal loans, driver responsibility fees, attorney fees, and business debts.


However, there are certain debts that will not be discharged in Chapter 7. These include child support, certain taxes, alimony, student loans, debts from divorce or separation, government fines and penalties, and debts from personal injuries caused by a debtors impaired driving.


Additionally, a creditor can avoid discharge when they successfully object to the bankruptcy court. This usually happens when the debtor commits fraud or intentionally takes on debt with no intention of paying it off.


What About My Mortgage or Car Loan?


Your mortgage and car loan are secured debts. If you are current on payments, you have a few options. First, you can surrender the property such as foreclosure. A second option is to reaffirm the debt which essentially treats the debt like no bankruptcy has been filed. Finally, you can negotiate with the creditor to forgive the debt in exchange for a lump sum.


If you are not current on your payments, the creditor can usually foreclose your property and repossess. Try to prioritize these debts if possible and get your payments current before filing bankruptcy if you intend to keep your property.


Hopefully these basic tips will help you better understand Chapter 7 bankruptcy. Deciding to file for bankruptcy is an important decision and this knowledge can help in your decision making before taking action.


Conclusion


Although the bankruptcy laws are designed to give debtors relief from creditors and debt, the process can be complicated and intimidating. Comprehensive research on the topic can help you decide if bankruptcy protections are right for your specific situation. Finally, it is recommended you contact a qualified bankruptcy attorney to ensure all of your information is filed accurately and on time.