How Does it Work?

As soon as you file Chapter 7 bankruptcy, the court files an automatic stay. This means all creditors must stop all collection efforts. This includes garnishing your wages, eviction, turning off your utilities, or even calling you to ask about payment.

You’ll work with a trustee who will determine the value of your assets, which assets you must liquidate to pay your creditors, and which property is exempt. You may also have a meeting with your creditors where you’ll answer a series of questions about your bankruptcy and financial situation.

Once the paperwork and meeting of creditors are complete, the trustee decides if you’re eligible and if yes, will liquidate your assets, pay off your creditors and complete the bankruptcy process.

Who Qualifies for a Chapter 7 Bankruptcy? 

All potential Chapter 7 bankruptcy filers must pass a means test. This test eliminates the risk of high-income earners filing for BK just because they can.

To pass the means test, one of the following must be true:

i) You make less than the median income for your area

ii) Your disposable income (income after paying your required bills) is less than required

To qualify with your disposable income, your bills must be within reason, although the actual amount is somewhat subjective. If your disposable income is too high, it’s of the expectation that you’ll use the funds to repay your creditors. If not, you can file bankruptcy.

What Debts can you Discharge?

Contrary to popular belief, you can’t discharge all debts in a bankruptcy. In general, though, you can discharge the following:

  ● Unsecured credit card debt

  ● Unsecured personal loans

  ● Medical bills

  ● Other forms of unsecured debt

What Debts can you not Discharge?

Certain debts cannot be discharged because of the level of responsibility they create:

  ● Alimony

  ● Child support

  ● Tax liens

  ● Outstanding court fees

  ● Debts you owe as a result of driving intoxicated and harming another person or property 

  ● Mortgage (unless you’re giving up possession of the home)

  ● HOA dues (unless you’re giving up possession of the home) 

What Will you Lose?

If you file Chapter 7 bankruptcy, you must liquidate your assets. Trustees use the proceeds to pay creditors at least a part of what you owe while discharging the rest.

There are exemptions to the amount the courts can liquidate, though. The exemptions below are federal exemptions. If your state has different exemptions, they may let you choose among the two, talk to your attorney about your options.

In general, you can exempt:

  ● $25,150 of home equity if you’ll stay in the home

  ● $4,000 in your vehicle

  ● $1,700 in jewellery

  ● A total of $13,400 in personal items

  ● $2,525 in books and other tools of the trade needed for your career

  ● Health aids

  ● Up to $13,400 in life insurance value

If you’re married filing jointly, you can double these exemptions.

You can also exclude child or spousal support, Social Security income, life insurance payments, or support you receive for injuries or wrongful death of a spouse.

If you have retirement accounts, employer-sponsored accounts (tax-deferred) are 100% exempt and IRAs are capped up to $1,362,800.

When Does it Make Sense to File Bankruptcy?

It’s a tough decision to choose bankruptcy, but sometimes it’s the only choice. To decide if it’s right for you, try exhausting all other options first including:

Talk to your creditors

You may be surprised at how willing creditors are to work with consumers today. If you’re honest and call them as soon as you’re having trouble and not after you miss numerous payments, they may have a payment arrangement that works for your situation.

Debt consolidation

You can consolidate debt yourself or work with a debt settlement agency to create a plan. Either way, you combine your debts into one payment. You make that payment each month and it covers all your debts. If you need some negotiation or help affording the payment, a debt settlement agency may be your best answer.

Settling for less than the full amount

If you have assets you can liquidate or have another way to pay less than the full balance owed, consider talking to your creditor about settling for less than the full amount. It will hit your credit score a little bit for the ‘settled for less than full amount’ status, but it may be better than a bankruptcy.

If none of these situations fit your criteria, your best bet is filing for bankruptcy. Working with a qualified attorney will help you determine your best options. An attorney can help you determine which personal assets you’d lose, the effect of the bankruptcy on your credit score, and how you can recover.

It becomes more complicated when you own a home or own expensive cars and want to keep them. Since it’s a liquidation bankruptcy, most assets will go that exceed the personal exemptions. 

Final Thoughts 

Look at all of your options before filing bankruptcy. It’s not a ‘cowardly’ thing to do if you must file BK. If it’s what you need to get a fresh start and you will be responsible for your credit moving forward, it could be just what you needed.

Look at the consequence of all options and decide which one is right for you as you try to move forward with your finances.