Chapter 7 bankruptcy is a legal process that helps individuals and businesses clear most of their outstanding debt. They can opt for this type of bankruptcy to get a fresh financial start. However, the process is lengthy and complex. Also, you must qualify for all its eligibility criteria to apply for bankruptcy.
In this article, we will learn more about Chapter 7 bankruptcy in detail. On top of this, we will go through the five critical things that you need to keep in mind before applying for this type of bankruptcy. So, let us get started.
Overview of Chapter 7 Bankruptcy
Chapter 7 bankruptcy refers to the legal process in which the non-exempt assets of the debtor (individuals or businesses) are liquidated to pay off all the creditors. It is also known as liquidation bankruptcy or straight bankruptcy because you must sell all your non-exempt assets to pay your debt with the proceedings.
You may keep some of the exempted assets to a certain limit. In this process, there are no repayment plans, so it is the most common last resort for individuals and businesses in debt. However, as shared before, debtors can clear most of their debts and get a fresh start with this bankruptcy type.
The order of paying the debts follows the guidelines provided by the absolute priority rule. The rules say that unsecured debt has to be separated into different classes and categories, and every class is given a specific priority. Unsecured debt, like child support, personal injury claims, etc., is paid first, followed by secured debt, such as a mortgage. After all this, the remaining funds from the liquidation of the assets of the debtor are used to pay non-priority unsecured debt.
5 Things You Should Know About Chapter 7 Bankruptcy
Here are the important things that you need to know before you apply for Chapter 7 bankruptcy.
1. Who Is Eligible for Chapter 7 Bankruptcy?
You have to qualify for the means test for Chapter 7 bankruptcy. The means test is a financial assessment tool that compares your income to the state median. If your income is lower than the median value, then you are eligible for this type of bankruptcy. Also, you have to complete the credit counseling within 180 days before your filing. The course will help you to understand your current financial situation and explore options other than bankruptcy.
Besides this, you must not have a Chapter 7 discharge within the last 8 years and a Chapter 13 discharge within the last 6 years. Businesses can also opt for this type of bankruptcy, but they are not subjected to the means test.
2. Liquidation of Assets
When it comes to Chapter 7 bankruptcy, the non-exempt assets may be liquidated to pay off the debt of the creditors. The bankruptcy trustee is responsible for selling the assets and repaying the creditors by distributing the collected proceedings. There are many essential assets that are protected under bankruptcy exemptions, such as your home, primary vehicle, etc. The Chapter 7 bankruptcy aims to satisfy the current debt as much as possible and allows the filer to retain enough assets to get a fresh start.
3. There Are Some Dischargeable Debts
Some types of unsecured debts are discharged in Chapter 7 bankruptcy, such as credit card balances, medical bills, and personal loans. However, all the debts cannot be erased under it. There are several non-dischargeable debts like child support, alimony, student loans, etc., and you have to pay certain tax obligations.
The entire process takes some time, after which all the eligible debts will be cleared so you can have a clean slate and a fresh start. So, it is important to understand which debts can be discharged and which fall under the non-dischargeable category before you file for this type of bankruptcy.
4. Chapter 7 Bankruptcy Impacts Your Credit Score
You have to remember that filing for Chapter 7 bankruptcy will impact your credit score severely. It will remain on your credit report for up to 10 years. Your score will drop, and you will find it hard to obtain credit or other loans. However, some people find that their credit improves once they are cleared of all the debt, as they can focus on rebuilding their current financial status.
5. Automatic Stay Protection
When you file for this type of bankruptcy, the court will issue an automatic stay. The stay halts all the creditors’ collection activities, which include harassment, repossessions, etc. It provides you with immediate relief and stability so that you can understand and complete the bankruptcy process without any stress and pressure.
Do You Need a Bankruptcy Lawyer When Facing Chapter 7 Bankruptcy?
Yes, it is highly beneficial to hire a bankruptcy lawyer when you are facing Chapter 7 bankruptcy. You can file it on your own, but the process is complex, and you must have complete knowledge of all the updated bankruptcy laws. A skilled lawyer will guide you through all aspects of the process.
He/she will make sure that you are eligible for this type of bankruptcy by checking the means test. Also, he/she will complete all the required paperwork properly. Besides all this, your lawyer will represent you in court, negotiate with the creditors, and make sure that your rights are protected while you complete the entire process.
