What is Chapter 7 Bankruptcy? 5 Things You Need to Know

Chapter 7 Bankruptcy, also known as liquidation bankruptcy, is one of the most common forms of bankruptcy in the US. It is called liquidation bankruptcy because, after filing for Chapter 7, a bankruptcy trustee will be put over all of your nonexempt assets and liquidate them to help pay off your debts. That said, many people find bankruptcy exemptions can help protect certain belongings.

If you have debt collectors pursuing you, especially if a debt collector sues you, many people choose to file Chapter 7 bankruptcy.

Chapter 7 Bankruptcy occurs when you can no longer keep up with your monthly payments on bills and debts. In order to qualify for Chapter 7 bankruptcy, there are a few criteria that you will have to meet, but it can help take you from drowning in debt to a place of financial security if you are willing to go through the process. 

Why Do People File Chapter 7 Bankruptcy?

There are many common reasons that people may file for bankruptcy. Job loss, overwhelming medical expenses, and overextended credit are just a few of the countless reasons a person may decide to file for bankruptcy. Before filing, you should also consider the pros and cons of Chapter 7.

There are also a few benefits to filing for bankruptcy when you are in one of these situations. When you file for bankruptcy, you become insulated and protected from your creditors, which allows you to start paying off your debt without the looming threat of repossession or garnished wages. Filing for bankruptcy allows you the chance to work towards financial stability while being assured that you won’t be evicted or without running water.

How Does Chapter 7 Bankruptcy Work?

We can break down the process of Chapter 7 bankruptcy into 7 steps. Keep in mind that, while these things are going on, you will have a bankruptcy trustee that is taking all of your nonexempt possessions, liquidating them, and paying off creditors with the money. This will all occur while you are going through these next seven steps.  Many people decide to hire a bankruptcy attorney to help with their case, but there are others that decide to file Chapter 7 bankruptcy without an attorney.

One of the first steps after deciding whether to hire a bankruptcy attorney is to estimate whether you qualify for Chapter 7 bankruptcy. This is done via the Chapter 7 means test. The Chapter 7 means test helps the court determine whether you have the ability to pay back some of the debt. If you do, you may have to file a Chapter 13 bankruptcy. 

1. Attending a Credit Counseling Session

Before you can petition the court to declare bankruptcy, you will have to have a credit counseling session with a court-approved agency. This has to occur less than six months before the day you decide to file your petition. This session will walk you through the different options that are available to you, the best ways to come back from bankruptcy, and whether or not you could possibly qualify for bankruptcy.

2. File for Chapter 7 bankruptcy

At this point, you have come to the realization that you can no longer maintain your debt payments along with your living expenses and decided that bankruptcy is the best option for you. When this happens, you will start by petitioning the court for bankruptcy. To do this, you will fill out legal documents that you will submit to the court that discloses all of your financial information, going back as far as ten years. These will all be submitted to the court to review.

3. An Automatic Stay is Placed on Your Creditors

If this is the first time you have ever filed for bankruptcy, an automatic stay is placed on your creditors, meaning they can no longer take action against you by calling you, collecting money, foreclosing, or repossessing your things. There are a few exemptions to this stay, and creditors are also able to go to court to ask the judge to lift the stay, however, in most cases, the automatic stay freezes most forms of debt.

4. Attend a Meeting of the Creditors

At this point, your bankruptcy trustee will hold a meeting of the creditors. During this meeting, you will be asked questions about your financial situation to ensure your petition is honest and qualifies for bankruptcy. Creditors are allowed to attend this meeting to ask questions and hear your responses, though it is often that they do not attend the meeting, especially if you are dealing with larger national agencies.

5. Complete a Financial Management Course

The goal of going through bankruptcy is to have a better understanding of money management when you get to the other side of things. To do this, a bankruptcy filer will have to go through a debtor’s education course before receiving a bankruptcy discharge.

6. Court Issues a Bankruptcy Discharge

Once you have gone through the previous steps, the court will issue a bankruptcy discharge. This means that all the debt that can be forgiven will be wiped out. However, there are some debts that cannot be removed, which will be turned back over to you to take care of. Once the discharge is issued, the automatic stay is removed, and the surviving debts can once again be collected on.

7. Court Closes the Case

In most cases, the court will close the case once the discharge is given, however, there are some things that could cause the case to go longer. If there is any bankruptcy litigation, or if your bankruptcy trustee has not yet distributed all nonexempt assets, your case may stay open while this process continues.

What Are the Costs of Chapter 7 Bankruptcy?

There are some fees associated with filing for Chapter 7 bankruptcy. The cost to file a petition for bankruptcy with the court is $338. This price is the same nationwide. The other cost to consider is your Attorney Fees.

While there is a wide range of costs for attorneys, you can expect to pay anywhere from $500 up to $3,500 based on the complexity of your case and the experience of your attorney. In total, you can expect your Chapter 7 Bankruptcy to cost anywhere from $838-$3,838. There may be other fees associated with filing for Chapter 7 bankruptcy, like paying for debt management classes or credit counseling.

Chapter 7 Bankruptcy Alternatives

Sometimes it can seem like bankruptcy is your only option when you feel as though you are drowning in debt. However, there are some other viable options that you may want to consider before filing for bankruptcy.

  • Chapter 13 Bankruptcy - Chapter 13 bankruptcy is a common alternative to Chapter 7 bankruptcy. A Chapter 13 bankruptcy is known as a wage earners plan because it is a payment plan bankruptcy for those who make income. The bankruptcy lasts 3 or 5 years and is on your credit report for 7 years instead of 10 years. You may wish to research Chapter 7 vs Chapter 13 bankruptcy.
  • Debt Consolidation - If your struggles are more about the sheer number of payments you have to make and your inability to keep up with what you owe each month, you can consider consolidating your debt into one monthly payment. While this is typically only available to debtors with decent credit, it is a great option, considering the debt transfers at a low, or even 0%, interest.
  • Debt Settlement - If you are unable to pay back what you owe to your creditors, you can request a debt settlement. The goal of debt settlement is to agree upon a lower price than your total debt balance that you can pay off and have the debt be fully satisfied. Typically, this works well if you have a small number of creditors you are working with, and can front the smaller sum in cash or on a much smaller time frame.
  • Debt Management Plan - If neither of the previous two options are available to you, you may be able to create a debt management plan that will help organize and outline your way out of debt. Typically, you can work with a credit counseling agency who will work on your behalf with your creditors to reach a payment plan that gives you a better chance at fully paying off your debts. There are, however, a few disadvantages. In most cases, if you miss a single payment, your creditor is allowed to cancel the plan, meaning you will have to go back to the original payment plan. You also will still have to repay the full amount under this alternative, though it is spread out over a longer period of time.

Conclusion

The thought of filing for bankruptcy can be intimidating. Luckily, the process is designed to help you overcome your overwhelming debt, learn how to take control of your finances, and come back financially stable and ready to rebuild with a clean slate. 

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