If you are dealing with debt that has become unmanageable despite your best efforts at repayment, Chapter 7 bankruptcy may be an avenue to consider. Although Chapter 7 bankruptcy comes with its own set of drawbacks to keep in mind, it also has the potential to help you begin rebuilding toward a healthier financial future.
Chapter 7 bankruptcy is often referred to as “liquidation bankruptcy” because it allows individuals to completely discharge some portions of their debt, but only after certain assets have been liquidated. It is both the fastest and most common type of bankruptcy, and often allows debt to be discharged within three to five months of filing. However, before filing, there are some important factors to consider.
First, you should consider your current financial situation to determine eligibility. When filing for Chapter 7 bankruptcy, a variety of financial documents will be disclosed, including schedules of assets, liabilities, income, and expenditures, transcripts of tax returns, and a list of all owned property, among other information. As with any form of bankruptcy, individuals must also undergo credit counseling and provide a record of completion before filing.
In addition, your income must either be below the median income of your state, or you must pass the Chapter 7 means test to be eligible for Chapter 7. The means test calculates whether an individual has enough disposable income, or income left over each month after expenses have been paid, to feasibly repay their debt. If the test determines there is not enough disposable income, you may qualify for Chapter 7 even with an income above your state’s median level.
Once eligibility has been determined, it’s important to consider the nature of the assets you currently own. Because Chapter 7 requires liquidation of certain assets, it is often best suited for those who either do not own lots of assets or otherwise high-value property that they do not wish to sell. Each state is permitted to set its own property exemption laws which determine how much property is exempt and thus protected from being sold to cover an individual’s debt. While exemptions vary by state, each state sets out a dollar limit, above which any property, or assets, may be sold to cover an individual’s debts. In Florida, you can exempt your owned home 100%. Additionally, you can generally keep things like your clothing, furniture, electronics, and your car (by either exempting it or reaffirming the car loan).
Once eligibility and property exemptions are considered, the filing process can begin. As soon as a petition for Chapter 7 is filed, the individual who filed is protected from most collections against them or their property. Each case is then assigned a trustee, who primarily handles the selling of any nonexempt assets or processing a no-asset bankruptcy.
In a typical Chapter 7 case, an individual’s debt will be discharged within 3 to 5 months. However, the debts discharged under Chapter 7 will be only “unsecured” debts, including credit card debt, personal loans, medical bills, and any other debt that is not secured by collateral. Secured debt, like mortgages, student loans, and car loans, will not be discharged under Chapter 7. It is also important to remember that Chapter 7 can negatively impact your credit score for up to 10 years if you don’t work to rehabilitate your credit score.
While a vast majority of Chapter 7 petitions result in a discharge of the individual’s debt, there are quite a few eligibility exceptions and other pre-filing considerations. Guidance from trusted legal counsel can be indispensable in determining your eligibility and whether Chapter 7 is the best step forward for you.
If you are interested in learning more about the Chapter 7 bankruptcy feel free to contact Savage Villoch Law, PLLC.