Chapter 7 is a specific chapter in the federal bankruptcy laws that represents what is known as straight or liquidation bankruptcy and that can wipe your financial slate clean.
If your bills have become insurmountable and keeping up with the costs of daily living is no longer possible, a Chapter 7 bankruptcy can work as a financial do-over that allows you to move beyond the financial rubble you find yourself in. It's important to note that Chapter 7 bankruptcy is not without serious consequences that can include relinquishing possessions and taking a serious hit on your credit score.
At the most basic level, Chapter 7 bankruptcy automatically initiates a temporary hold on your current debts that stops creditors from continuing to engage in any of the following practices:
From here, the court will take legal possession of your property and will appoint a bankruptcy trustee to your Chapter 7 bankruptcy case.
Your trustee is responsible for overseeing your bankruptcy from start to finish. He or she will carefully review your financials, including all assets and debts; will sell any nonexempt properties (properties that bankruptcy laws won’t allow you to keep); and will distribute the sale’s proceeds amongst your creditors (to help pay off current debt).
There are certain types of properties that the court will not require you to give up, and these exempt properties generally include:
Each of these exemptions will be assessed to ensure that it falls within reasonable parameters. For example, if you own a treasure trove of designer clothing (that has resale value), it’s unlikely that you’ll be allowed to keep it all.
The kinds of property that you will likely be required to relinquish for the trustee to sell include:
Those things of value that you own but that are not essential for living on a day-to-day basis are likely not to be exempt from liquidation. The total amount of property that you’ll be allowed to retain varies by state, but overall, Chapter 7 bankruptcy cases tend to be what is called a no-asset case, which means that all of the personal property you are allowed to retain must be either exempt or have a valid lien against it.
The basic steps in your Chapter 7 bankruptcy include the following:
From here, there will be what is known as a 341 meeting of creditors, which both you and your bankruptcy attorney will attend, and at which you will answer questions about your bankruptcy paperwork and your financial situation. You will also be required to attend a debtor education class that your bankruptcy attorney can attend with you and a financial management class that can be attended online. Finally – if you are successful in obtaining a Chapter 7 bankruptcy – your debts will be discharged, which means that all your debts that can be wiped clean will be. There are, however, certain kinds of debt that cannot be cleared by Chapter 7 bankruptcy, including:
Chapter 7 bankruptcy amounts to exchanging your debt for your nonexempt assets, and it tends to be a better option for those who have fewer nonexempt assets – or for those whose debt load far exceeds their assets. Once your trustee collects, liquidates, and distributes your assets, your debts will be discharged; your case will be closed; and you will move forward with a fresh financial start.
In order to qualify for a Chapter 7 bankruptcy, you must meet the following requirements:
While every bankruptcy case is unique to the circumstances involved, the bankruptcy process generally takes about four to six months from your initial credit counseling until your remaining debts are discharged. If you have properties that need to be sold and/or you need to submit additional documentation and bookwork, your bankruptcy case could take longer. Further, if you attempt to discharge student loan debt, which isn’t common but is sometimes possible, you are very likely looking at a lengthy trial ahead.
Bankruptcy is a major blemish on your credit history, and there is no way around this fact. Nevertheless, a Chapter 7 bankruptcy can turn your finances around, so it’s important to weigh what you stand to gain with the losses involved. A Chapter 7 bankruptcy can remain in your credit history – and on your credit reports – for up to 10 years after the date that you file. Because most instances of bad credit fall off credit reports after seven years, the accounts that were included in your bankruptcy case may be removed from your report before your bankruptcy disappears.
Deciding to move forward with a Chapter 7 bankruptcy is a big decision that can have both positive and negative consequences (simultaneously), which makes carefully considering the pros and cons of Chapter 7 critical.
A Chapter 7 bankruptcy will leave your credit rating in shambles, and it’s very likely to leave you without a credit card. With time, however, you’ll be able to build your credit back up. Additionally, if you’re considering bankruptcy, your credit is likely already in pretty meager shape.
Property loss can be one of the biggest drawbacks of a Chapter 7 bankruptcy. Any nonexempt property (as discussed above) will be liquidated and distributed to your debtors.
After obtaining a Chapter 7 bankruptcy, certain debts and liabilities can remain, such as mortgage liens, alimony and/or child support payments (including payments that are in arrears), and student loan debt.
Sometimes, if the filer has considerable disposable income, the courts will convert a Chapter 7 bankruptcy to a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, you’ll likely be required to repay the bulk of your outstanding debt over a period of from three to five years.
With a bankruptcy on your record, it can be very difficult to obtain a mortgage, which can mean that purchasing a home will be out of reach until the bankruptcy is removed from your credit report. This doesn’t, however, mean that it will be impossible for you to find a lender who is willing to work with you.
Now, let’s consider the upside to obtaining a Chapter 7 bankruptcy.
If you’re drowning in debt, you’re going to have creditors seeking payment, and this can lead to litigation. With a Chapter 7 bankruptcy, you can take care of the entire matter in as little as a few months and can generally avoid litigation entirely.
Debt collectors aren’t usually shy about coming after debt that’s owed them, and it can feel like they’re coming at you from all angles. Once you file for a Chapter 7 bankruptcy, it will automatically halt creditors’ invasive practices and will allow you to focus on your journey forward toward greater financial freedom.
Chapter 7 bankruptcy can eliminate many types of debt, including:
If you are considering a Chapter 7 bankruptcy, you are facing considerable financial hardship, and you can use a helping hand. Fortunately, the accomplished bankruptcy attorneys at Kain & Scott in Minnesota are here to oblige. We understand your financial dilemma, and we have the compassion and legal skill to help you find your way out. To learn more about what we can do to help you, please give us a call or contact us online today.