Chapter 7 Bankruptcy is right for you if you have no assets to lose and, after paying basic monthly expenses, you have no money left to pay off debts. It gives you a fresh start and can alleviate your stress by removing your liability for repaying debt. Primary priorities for Chapter 7 filers should be to keep exempt assets and be relieved of all liability for as many debts as possible.
Qualifications & Eligibility
The size of your debt has nothing to do with your opportunity to file a Chapter 7 – it solely depends on your ability to pay your debt. Because your income directly affects your ability to pay off debt, there are specific income qualifications you must meet. Your average income over the past six months must be lower than your state’s median income. If your average income doesn’t fall below your state’s median income you must complete a “means test.”
The means test was designed to allow only those who truly can’t pay their debts to file Chapter 7 bankruptcy. This test calculates your disposable monthly income by subtracting your “allowed” monthly expenses from your monthly income. (Allowed monthly expenses vary by state and often by city as well, but commonly include your basic necessities such as housing, transportation, food, etc.)
Additionally you cannot file, if during the 180 days before you file:
- A prior bankruptcy petition you filed was dismissed
- You haven’t received credit counseling
Costs
There are some upfront fees associated with filing for bankruptcy. Because the court understands your financial situation is difficult at this point in time, there is some flexibility with payment. The first fee is a $245 case filing fee, paid per petition (so if a couple files a joint petition, only one filing fee is incurred). Then there will be a $45 administrative fee and a $15 trustee surcharge.
Filing Process
To initiate the bankruptcy process you must file a petition. Along with this petition you must file the following:
- Schedule of assets & liabilities
- Schedule of current income and expenditures
- Statement of financial affairs
- Schedule of executor contracts and unexpired leases
- Copy of the most recent tax year tax return or transcript
- Previous unfiled tax returns
- Tax returns filed during the bankruptcy case
- Certificate of credit counseling (copy of debt repayment plan completed during credit counseling)
- Evidence of payment from employers receive 60 days before filing
- Statement of monthly net income (plus any anticipated increase in income or expenses after filing)
- Record of any interest in federal or state qualified education or tuition accounts
- Schedule of exempt property
Upon completion of filing your petition, any collection actions by creditors must be stopped. This is known as the “automatic stay.” The court will notify all the creditors you named in your petition who then need to stop attempting to collect on your debt through lawsuits, wage garnishments, telephone calls, etc.
Creditors Meeting
Twenty-one to 40 days after your petition is filed with the bankruptcy court, the trustee assigned to your case will hold a creditors meeting for you, your trustee, your creditors and your bankruptcy attorney, if you have one. You will be placed under oath and the trustee and creditors will ask you questions about your debt and your financial situation. Your bankruptcy attorney can prepare you for this meeting by exposing you to the questions that will be asked and the best way to answer them.
Case Closed
A discharge order – eliminating liability for repaying your debts and stopping any future creditors’ collection actions on this debt – will be issued 2-3 months after your meeting with creditors. Chapter 7 bankruptcy is a fairly quick process if your petition is accepted. Apart from cases that are dismissed or converted, 99% of chapter 7 cases are discharged.
There are numerous exceptions, exemptions, non-dischargeable debts, special circumstances and so on that can affect your case. Bankruptcy attorneys or other legal counsel should be obtained before filing for bankruptcy. They can streamline the process, apply best practices, offer advice and assist you in all elements of the process.
A bankruptcy attorney can also prevent your discharge from being denied by ensuring you perform all the necessary steps for filing effectively and in line with the court processes. For a complete list of reasons your discharge may not be granted, read our Stipulations for Receiving a Bankruptcy Discharge blog.
Our next blog in the series will dive into Chapter 13 bankruptcy. But, if you think Chapter 7 may be right for your financial situation, talk to a Bankruptcy Attorney to learn more or to start the process.
