Chapter 7 Bankruptcy

While there are several types of bankruptcy, Chapter 7 is the most popular type of bankruptcy filed by individuals. Unlike Chapters 11, 12, and 13, which require you to restructure your debt, Chapter 7 liquidates all of your non-exempt property in order to pay back your creditors. While Chapter 7 allows you to discharge certain types of debt, tax-related debt, student loans, and spousal and child support must still be repaid.

To begin Chapter 7 proceedings, you will have to file a bankruptcy request from the court. Once you have filed bankruptcy, an automatic stay will be issued that prohibits creditors from harassing you about the money they are owed.  To decide if you are eligible for Chapter 7, the court will perform a means test.

The bankruptcy means test looks at several different things. The court will compare your income to the median income for households of the same size in your state, calculate your disposable income, and compare your unsecured debt to determine if you should file Chapter 7 or Chapter 13 bankruptcy. A bankruptcy lawyer can look at these factors before you file to determine which chapter is right for you.

If your request for Chapter 7 is approved, you will attend a 341 meeting with your creditors. During this meeting, a court-appointed trustee will look over your tax returns, bank statements, pay stubs, and other documents to determine how to liquidate your assets and distribute the proceeds among your creditors for unsecured debt. Unsecured debt is debt incurred without putting up collateral, such as medical bills and credit card debt. Once your creditor has received payment from the liquidation, your debt will be discharged.

If you have secured debt, such as a mortgage, it will not be erased during Chapter 7 bankruptcy. Instead, you have three options: continue paying on the debt, pay off the current value of the property, or allow repossession of the property.

Chapter 7 can be a godsend to those who are struggling with their debt. If your bankruptcy motion is successful, debts such as medical bills, payday loans, personal loans, and wage garnishments may be discharged, allowing you a chance to start over fresh.