For Chapter 7 bankruptcy, there is no such thing as too much or too little debt. However, there are a number of crucial aspects to consider before deciding whether bankruptcy is the best debt relief option for you right now.
What is the minimum amount of debt for Chapter 7?
To file a Chapter 7 or Chapter 13 bankruptcy, you do not need to have a certain amount of debt. You can apply for bankruptcy even if you owe only $1.
Does Chapter 7 wipe out all debt?
Bankruptcy under Chapter 7 is a lawful debt relief option. If you’ve run into financial difficulties and are having trouble keeping up with your debt payments, declaring Chapter 7 bankruptcy may be able to help you get a fresh start. For the majority of people, this implies that the bankruptcy discharge eliminates all of their debt. However, not all debts are created equal, and what a Chapter 7 bankruptcy case may and cannot achieve is limited. Continue reading to find out what types of debts can be discharged in Chapter 7 bankruptcy.
Chapter 7 Bankruptcy Discharge Wipes Out Most Debts Forever
The majority of debts incurred by the average American consumer are discharged under Chapter 7. The following are the categories of debts that can be discharged in a Chapter 7 bankruptcy:
If you don’t have a reaffirmation agreement, you’re personally liable for secured obligations like vehicle loans.
When the discharge is entered, these dischargeable debts are automatically erased.
Some debts are only discharged in a Chapter 7 bankruptcy on rare occasions. The difference is determined by the timing and financial circumstances of the particular debtor filing bankruptcy.
Debts That Sometimes Can Be Eliminated In Chapter 7 Bankruptcy
Back taxes owed from income tax returns that were filed on time but not paid can be removed if they are more than three years old. There’s a lot more to determining whether a tax bill can be wiped by filing for bankruptcy, but it all comes down to timing.
Student loan debt: Student loans are not dischargeable in bankruptcy under the Bankruptcy Code. It is feasible, however, provided the filer can demonstrate that they would suffer undue hardship if the student debts were not canceled. To determine whether a debtor’s student debts should be dismissed, a separate adversary action is required. For this type of adversarial proceeding, there is no filing cost.
Debts That Sometimes Cannot Be Eliminated In Chapter 7 Bankruptcy
A credit card company or a bank may request that a debt they owe not be discharged. This can occur if the bank suspects the debtor of lying on their credit application. Credit card firms sometimes object, claiming that the debtor never intended to pay the amount and is exploiting the bankruptcy process.
Whether the individual debtor or the objecting creditor must show their case is determined under US bankruptcy law. It’s best to stop using credit cards as soon as you’ve decided to file bankruptcy to avoid this problem. Consider contacting your credit counselor during the necessary pre-bankruptcy credit counseling if you’re not sure how to make your budget work only on your monthly income. It may simply signify that you have stopped making your monthly debt payments. Although this may affect your credit score in the short term, it’s preferable to prevent a bankruptcy discharge objection.
Some Debts Can Only Be Erased In Chapter 13 Bankruptcy
A repayment plan overseen by a bankruptcy trustee is part of a Chapter 13 bankruptcy. While creditors do not receive huge interest rates (unsecured creditors do not receive any), they do receive something. That’s why, under Chapter 13 of the Bankruptcy Code, a bankruptcy filing can be used to discharge other debts related to a divorce, such as a property settlement.
Even if you meet the means test requirements for Chapter 7, if you owe a property settlement, talk to a bankruptcy lawyer about filing Chapter 13 instead. Although a Chapter 13 repayment plan can take up to five years to complete, it only stays on your credit report for seven years from the date of filing.
Filing Bankruptcy Provides Immediate Protection From Creditors
The automatic stay protects you after you file a bankruptcy petition for any type of bankruptcy. The automatic stay prevents debt collectors, banks, credit card companies, and anybody else who owes you money from contacting you or pursuing collection action. It “stays” or “stops” creditors from pursuing you for debt in any form, including wage garnishment.
This is something that everyone should be aware of. Domestic support responsibilities and back taxes are the sole exceptions. This will continue to happen if your child support payments are deducted directly from your salary. Even if you file bankruptcy, the Internal Revenue Service is entitled to withhold your tax refund to pay back taxes you owe. The automatic stay is just for a limited time. It will come to an end after the bankruptcy court has granted you a discharge.
Let’s Summarize
The majority of consumer debt can be discharged in bankruptcy. Medical costs, personal loans, credit card debt, and most other unsecured debts are all erased under Chapter 7 bankruptcy. Debt incurred as a result of a “bad conduct,” such as injuring someone or lying on a loan application, cannot be forgiven. The ability to discharge tax debt through bankruptcy is contingent on a variety of variables that should be assessed by a bankruptcy attorney.
Is Chapter 7 or 13 worse?
Chapter 7 bankruptcy is often a better option than Chapter 13 bankruptcy. For example, Chapter 7 is faster, and many filers can keep all or most of their property without having to pay creditors through a three- to five-year Chapter 13 repayment plan. However, not everyone is eligible to file for Chapter 7 bankruptcy, and in some circumstances, Chapter 7 bankruptcy isn’t the best option. Find out when filing for Chapter 7 bankruptcy is preferable to filing for Chapter 13 bankruptcy.
Immediate relief in the form of a much-needed breathing spell
You are protected from creditors as soon as your bankruptcy case is filed with the bankruptcy court. When you file for bankruptcy, all collection operations are automatically halted. All phone calls, garnishments, and collection letters must cease immediately. Repossessions, evictions, and foreclosures were all put on hold for the time being.
Permanent debt relief in the form of a bankruptcy discharge
Most sorts of debt, including credit card debt, medical bills, and personal loans, are erased when you file Chapter 7 bankruptcy. When the bankruptcy court grants you a bankruptcy discharge, you no longer have to pay these sorts of unsecured debts.
Getting your bankruptcy discharge is virtually guaranteed
You can achieve your bankruptcy discharge in as short as three months if you’ve never filed bankruptcy before, pass the means test, and act honestly with the bankruptcy court and the bankruptcy trustee. It’s virtually automatic if you make sure you meet all conditions before and after filing your bankruptcy petition.
You’ll probably get to keep all of your stuff
More than 95 percent of people who file Chapter 7 bankruptcy in the United States keep everything they own. This is because the law safeguards certain assets, known as exempt assets, from creditors. If it’s covered by an exemption, you get to retain it, whether it’s your monthly social security check, your watch, or your kitchen table.
If you want, you can even keep your car after filing bankruptcy
You’ll have to pay for it, but isn’t that just fair? If you don’t want to keep it, though, Chapter 7 bankruptcy permits you to walk away from both the car and the loan! Here’s all you need to know about preserving your car after declaring bankruptcy under Chapter 7.
After filing bankruptcy, missed monthly payments and other negative marks on your credit report no longer hurt your credit score
When your bankruptcy is discharged, you will be given a clean slate on which to rebuild your credit and raise your credit score. One year after filing Chapter 7, the majority of folks have a higher credit score than they did when they first started the bankruptcy process.
Improved Access to Credit and Banking
You’ll get more credit card offers than you know what to do with shortly after filing for bankruptcy. This will not only assist you in rebuilding your credit and increasing your credit score, but it will also provide you with the security net that comes with owning a credit card in the event of an emergency.
What happens to my bank account when I file Chapter 7?
Your bankruptcy filing will have no effect on the money in your account if it is protected by an exemption. As part of their examination of your case, your case trustee may request bank account statements, but they will not contact your bank and will instead rely on you to furnish the information. In other words, if you don’t have any loans or credit cards with the same bank, your filing may not be discovered until much later.
Can a Chapter 7 be denied?
A Chapter 7 bankruptcy case rejection or denial is unusual, however there are reasons why a Chapter 7 bankruptcy case can be dismissed. Many denials are the result of an attorney’s lack of attention to detail, inaccuracies on applications, or outright fraud.
The lawyer must be well-versed in the law and comprehend the requirements of the courts and local trustees. Furthermore, the bankruptcy petition information must be complete by the attorney.
All relevant and required questions for the bankruptcy petition in the case must be asked by the debtor’s counsel. The petition must list all of the debtor’s assets, as well as the value of each item.
The trustee may be authorized to sell the asset if the value is significant in relation to the loan payoff. Any errors committed throughout that process may result in the petition being refused.
The primary criterion for a Chapter 7 discharge is that the debtor’s household income must be less than the debtor’s necessary/reasonable monthly household expenses. It must be demonstrated that the debtor is unable to pay the amount on a monthly basis.
Who needs to fill it out?
If you’re filing for bankruptcy under Chapter 7, you’ll need to fill out this form. If you’re filing bankruptcy with your spouse, you can file a single Form 122A-1, though in some situations, separate forms may be required.
How to fill it out
Fill in information about your bankruptcy case in a box near the top of the form. If you have one, enter your name, the bankruptcy court where you filed, and your case number.
The United States Courts’ Court Locator tool can help you figure out which bankruptcy court you need to file in. Select Bankruptcy from the “Court Type” drop-down menu, then input your ZIP code and click “Go.” Leave this area blank if you don’t yet have a bankruptcy case number.
After that, choose your marital and filing status from the options below:
- You and your spouse are one of the following if you are married and your partner is not filing for bankruptcy with you:
Depending on your response, you’ll either need to fill out the form with only your income (Debtor 1) or two columns with both your income (Debtor 1) and your spouse’s income (Debtor 2).
The average monthly income column should be simple to complete. Simply sum up your revenue from each source over the preceding six months. Then divide the six-month sum of each source by six to get the average monthly income from that source.
You’ll need to fill in your gross earnings, which you should be able to discover on your last six pay stubs. Make certain you utilize the total amount (before taxes and deductions).
You’ll also need to include any other sources of income. Include income from spousal or child support, money from your own enterprises, income from your own investments (such as dividends), unemployment income, retirement income, or any other income you expect to earn.
If you’re having trouble remembering how much money you’ve gotten from each of these sources, go back six months on your bank statements.
Make certain to include all of your earnings. In general, if you get a deposit in your bank account, you should consider categorizing it as income. Receiving cash or a check may be considered income if you don’t have a bank account. Still have questions about what constitutes income? You might want to get advice from a bankruptcy attorney.
Multiply your monthly income by 12 to find your yearly income, as there are 12 months in a year. Then, using the United States Department of Justice website, compare your annual income to the annual median family income for your household size in your state. Part 2 of Form 122A-1 contains the comparison.
Scroll down to the yellow box and select the relevant date from the drop-down option to get the median income amount, then click “Let’s go.” Choose the most recent time period if you haven’t yet filed your case. Then, select the “Link to “Median Family Income by State/Territory and Family Size.” In the first column, look for your state. Then look at the column that applies to your family size by moving across that row.
For example, if you have a three-person household and live in Colorado, the income you’d compare yours to is $84,952 (assuming you file in 2018). This number should be entered on line 13 of the form. If your yearly income is less than $84,952 as determined on line 12b, you may be eligible to file Chapter 7 bankruptcy. If it’s more than $84,952, you’ll need to go on to Form 122A-2, which we’ll go through in the following section.
It should be noted that each state calculates median income differently. While the typical income for a three-person household in Colorado in 2018 was $84,952, it could be more or lower elsewhere.
How long will Chapter 7 Stay on credit?
The duration of a bankruptcy filing on your credit record is determined on the type of bankruptcy you filed. We looked at the differences between Chapter 7 and Chapter 13, the two most common types of consumer bankruptcies, and how they affect your credit score.
- Harrison alludes to Chapter 7 bankruptcy, which is also known as liquidation bankruptcy “I’m going bankrupt.” It’s the most prevalent type of consumer bankruptcy, and it normally takes three to six months to complete. Those who file for Chapter 7 will no longer be responsible for any unsecured debt (loans granted simply on the basis of creditworthiness), such as personal loans, credit cards, and medical bills, but they may be forced to sell some of their assets to pay off secured loans. Bankruptcies filed under Chapter 7 remain on consumers’ credit reports for ten years after the filing date.
- Chapter 13 bankruptcy: According to Harrison, Chapter 13 bankruptcy is the most common type of bankruptcy “The bankruptcy of a wage employee.” For those who have the income to repay their obligations, but not necessarily on time, this type of filing provides a payment plan. Chapter 13 bankruptcy accounts for around a third of all bankruptcies filed (the remaining being Chapter 7). Those who file for bankruptcy must still pay their bills, but over a three-to-five-year period. Bankruptcies filed under Chapter 13 remain on a consumer’s credit report for seven years after the filing date.
Can Chapter 7 be removed early?
A Chapter 7 bankruptcy differs from a Chapter 13 bankruptcy in terms of severity. A Chapter 7 bankruptcy can be on your credit history for up to 10 years from the filing date, whereas a Chapter 13 bankruptcy can stay on your credit history for up to 7 years, according to the Fair Credit Reporting Act (FCRA).
Only the legal maximum period of time bankruptcies can appear on your record is specified by the FCRA, not the minimum. This means that a bankruptcy can be discharged earlier than the legal maximum, but it must be demonstrated that the bankruptcy was falsely reported, unfounded, or otherwise erroneous. You cannot get rid of a bankruptcy just because you don’t want it.
Does Chapter 7 ruin your credit?
The most significant component in determining your credit score is your payment history, and declaring bankruptcy signifies you won’t be paying covered bills in full as agreed.
As a result, declaring bankruptcy can significantly harm your credit score. A Chapter 7 bankruptcy will be on your credit reports for ten years and have an impact on your credit scores; a Chapter 13 bankruptcy will have an impact on your credit reports and scores for seven years.
Lenders will be able to view your bankruptcy on your credit reports in the public records section, regardless of which form you pick, and it will almost certainly be a factor in their choice. It will demonstrate that both the bankruptcy and the debts contained in it have been discharged once you’ve completed the legal process.
Lenders may refuse to approve your credit application unless your bankruptcy has been discharged. Even then, obtaining authorized for certain types of loans may be difficult. If you are authorized, you may be subjected to high interest rates and other undesirable conditions.
What qualifies you for Chapter 7?
Many categories of unsecured debt can be discharged in Chapter 7 bankruptcy, often known as straight or liquidation bankruptcy. However, not just anyone can petition for bankruptcy under Chapter 7. The following are some of the prerequisites for filing for Chapter 7 bankruptcy.
- Your monthly income must be less than the median income for a similar-sized household in your state during the previous six months; otherwise, you must pass a means test. This test assesses if you have sufficient disposable income to make partial payments to unsecured creditors. Don’t worry if you fail the means test: you may still be eligible for Chapter 13 bankruptcy.
- If you tried to file for Chapter 7 or 13 bankruptcy but were denied, you must wait at least 181 days before filing again.
- Before filing for bankruptcy, you must normally complete an individual or group credit counseling course given by an accredited credit counseling service within 180 days.
- Even if you qualify for bankruptcy, a judge may dismiss your case if it is discovered that you are attempting to cheat creditors. For instance, suppose you rack up charges on a credit card with the intention of declaring bankruptcy to avoid paying the amount.
Do they freeze your bank account when you file Chapter 7?
If the money in a checking account, on the other hand, does not qualify for any form of exemption, you will have to hand it up to the bankruptcy trustee. It will be used to settle debts with creditors. Only a portion of the money in a checking account is usually exempt, and the rest must be turned over to the trustee.
A bank account may be frozen if a person files for bankruptcy under Chapter 7. You can inform the bankruptcy trustee of the freeze and ask them to contact the bank to have it lifted. The aim of the freeze is to keep assets in the checking account for creditors to collect on obligations, therefore if you can establish that the funds are fully or substantially covered by an exemption, the freeze should be lifted.
Before you file for bankruptcy, make sure that any checks you’ve written from a checking account have cleared. This is due to the fact that the bankruptcy trustee will check the account balance on the day of the filing. The balance may be larger than the amount you specified to the trustee if some checks have not yet cleared. This means that the surplus will almost certainly be non-exempt and will have to be paid to creditors.
