If your monthly debts feel overwhelming and it seems as if you have no standard of living, you may qualify for Chapter 7 bankruptcy. Filing for bankruptcy erases many of your monthly debts and can give you a little more financial breathing room. You may also consider Chapter 11 bankruptcy.
However, filing for Chapter 7 does come with numerous repercussions. If you’re considering filing for bankruptcy, here’s what you need to know.
Types of Debt Eliminated Under Chapter 7
Filing for Chapter 7 can eliminate the following types of debt:
- Business debt
- Credit card debt
- Past-due utility bills
- Car accident claims
- Civil court judgments
- Medical debt
- Personal loan debt
- Past due rent
- Veterans assistance loans
- Attorney fees
Under Chapter 7, it’s also possible to get your mortgage discharged; however, know that you do not get to keep your home if you go this route. If approved, your bank will foreclose on the home. Once they do, depending on where you live, you may still be financially responsible for any amount that is still owed to your lender.
Types of Debt Not Eliminated Under Chapter 7
Filing for Chapter 7 does not affect the following types of debt:
- Unpaid child support
- Student loans
- Recent tax obligations
It is possible to get your student loans discharged, but you must have suffered a permanent physical injury or illness that prevents you from working and paying upon it. This is an extremely rare ruling.
It’s also possible to get tax obligations older than three years eliminated, but you must have properly filed those taxes and they must not be older than three years. Also, if a lien was placed on your property by the IRS, Chapter 7 will not affect that lien.
Do You Lose All of Your Possessions When You File for Chapter 7?
If your petition for Chapter 7 is approved by a judge, yes, you will lose a majority of your possessions. This is because your property is used as a way to pay off your debts. Some possessions, however, are allowed to be kept if they do not exceed a certain dollar amount.
- Personal Property: Things like appliances, pets, books, and musical instruments are exempt up to $12,625. If an item’s individual worth is over $600, it cannot be kept.
- Motor Vehicles: Exempt up to $3,775. If your car’s value is over that amount, it will be sold off.
- Home Equity: Home equity no more than $23,675 can be kept. If you have more, the home may be sold off to pay off debts. However, if it is, you will receive your exemption amount of $23,675.
- Jewelry: Jewelry up to a value of $1,600 may be kept.
- Health Aids: All health aids may be kept under chapter 7 bankruptcy.
- Retirement Accounts: You can retain all of your 401k and 403k accounts, as well as $1,283,025 in IRA savings.
How to Qualify for Chapter 7 Bankruptcy
Before you file for bankruptcy, you need to take a credit counseling course. It’s essentially a course that discusses at length how to properly take care of your finances. Expect to pay around $15 for an online course, but it’s a good choice if you need to complete this requirement at your convenience.
Next, you have to take the bankruptcy means test. Though not a test in the traditional sense of the word, the bankruptcy means test is a thorough review of your finances that determines if you have enough disposable income after covering your essentials to repay any or all of your monthly debts. If it’s determined that you are below your state’s median income, you may qualify for Chapter 7.
The first part of the means test requires form 122A-1 and states your current monthly income. The second part is form 122A-2 and provides the means test calculation.
These forms help to establish the amount of your disposable income. If it’s found to be between $7,700 and $12,850, you’ll only be able to apply for Chapter 7 if it’s not enough to pay back at least 25% of your debt.
If your disposable income is more than $12,850, you cannot file for Chapter 7. You must instead file for Chapter 13 if you still wish to pursue filing for bankruptcy.
When to Hire a Lawyer
Though it’s not necessary, you should strongly consider hiring a lawyer to help you file for Chapter 7. This is because the slightest mistake on your part can have a judge quickly decline your request. It’s also highly recommended because there is a mountain of paperwork you have to find your way through. If you take your time with it, it’s possible to complete the process without error, but many people are tripped up by legal jargon and process details.
Required Forms to File
You can download and print every form you need from USCourts.gov. There are many options available and which forms you actually need vary upon your unique circumstances.
To get started, review Form B200 provides a comprehensive list that you can follow. In fact, it provides a list of four pages long of forms that you may or may not need to fill out.
After you submit your petition for Chapter 7, there are also numerous procedural forms you’ll need to submit thereafter. Again, this is why a lawyer is strongly advised for anyone considering filing Chapter 7. It’s far too easy to trip up on the paperwork and have your petition dismissed. Many people that try to do it on their own reach a stopping point and have to find a lawyer who is well versed in chapter 7 bankruptcy procedures.
Chapter 7 Filing Costs
It currently costs $335 to file for Chapter 7; however, it’s possible to get this fee waived or to pay it in four monthly installments.
You should also consider the cost of hiring a lawyer. Having a lawyer is not a requirement for filing Chapter 7, but your request is more likely to be approved if you have the help of one (assuming, of course, you also meet the minimum requirements). The price of bankruptcy lawyers can range anywhere from $500 to $3,500.
If you need to save money, it’s advised to find a newly licensed lawyer, as seasoned lawyers usually charge more for their services. You may also be able to find a lawyer willing to accept installment payments, but you’ll need to pay the full amount before your petition is filed.
How Chapter 7 Impacts Your Credit Score
Just how much Chapter 7 hurts your credit score depends on how high your score is prior to filing. There’s not a static number, but the pattern appears to be that most people who file for bankruptcy end up with credit scores around a mid to low 500. Any credit score within the 500 range is considered bad.
If a judge rules that you’re not eligible to file for Chapter 7, it’s still possible to file for Chapter 13. This at least would have your debts discharged after three to five years.
Chapter 7 vs. Chapter 13 Bankruptcy
Choosing between Chapter 7 and Chapter 13 depends on which one you qualify for and what is most important to you: discharging your debt or holding onto your possessions. With chapter 13 you don’t lose any of your possessions but you still have to make minimum payments, which must be agreed upon by your creditors.
With Chapter 7, much of your debt is discharged, but most of everything you own is sold off. It’s a definite trade off.
Another thing to consider is that Chapter 13 only stays on your credit report for seven years. With chapter 7, it could be there for as long as 10 years. With any bankruptcy on a credit report, lenders will be unlikely to approve your applications for credit. Some lenders are willing, but expect the cards or loan to have very high-interest rates!
From the time of filing to the actual approval of Chapter 7, most people have their debts discharged after about 90 to 120 days. However, know that some creditors may object to your debts being discharged, and, because of this, the process may take longer. This is another reason why it’s a good idea to have a lawyer working on your behalf. He or she can be the go-between for you so you don’t have to fight with your creditors.
The Bottom Line
Filing for bankruptcy is a decision that should not be made lightly. Before you do, try calling your debtors and explaining that you’re having trouble making ends meet. They may be able to work with you. After all, they know that if you move forward with filing Chapter 7, they won’t get anything out of you. Many debtors have been surprised to find out that their lenders were sympathetic and willing to make concessions on alternate payment plans.