Chapter 7 bankruptcy allows individuals to wipe out their debt and start over. In Chapter 7 bankruptcy the filer asks the court to discharge their debts. If the judge grants an individual’s discharge, then creditors are no longer able to collect on the debt.
Who Should File Chapter 7?
Chapter 7 relief is a good option for individuals who:
● Own little property
● Have credit card debt, medical bills and personal loans
● Qualify under the Means Test
1. Means Test: The Means Test determines who qualifies for a Chapter 7 bankruptcy. The means test is a calculation used to figure out if a person should pay back some of their debts. If an individual’s income is too high and the Court believes they can repay their debts, the court will want them to file a Chapter 13 bankruptcy instead of Chapter 7 bankruptcy.
Individuals who are behind on their bills and considering Chapter 7 bankruptcy, need to make sure that filing a Chapter 7 bankruptcy is the right financial decision. Individuals should ask some preliminary questions to determine whether it makes sense to file Chapter 7. Some questions that individuals should ask themselves are:
● Am I unable to meet my monthly living necessities if I keep paying my bills? - Individuals should consider filing Chapter 7 bankruptcy if they can’t meet their basic monthly living obligations. People who are forced to choose between paying their rent vs paying their credit card probably need to consider filing Chapter 7.
● Is my debt dischargeable in a Chapter 7 Bankruptcy? - Although most people can file Chapter 7 and get rid of most debts such as credit card bills, medical bills, and personal loans, some debts are not dischargeable in a Chapter 7 bankruptcy. Debts that are non-dischargeable means they cannot be erased in a Chapter 7 bankruptcy. Individuals who have debts that will not be discharged may need to consider other debt-relief options.
Debts that are non-dischargeable include:
1. Certain tax debts - taxes that are less than three years’ old
2. Child support & alimony debt
3. Luxury items recently purchased on credit cards
4. Debts to government agencies
5. Debts for retirement accounts
6. Debts for homeowners’ association fees
7. Attorney’s fees in child custody and support cases
8. Court fines, penalties, and criminal restitution
9. Student loans - unless you can show proof that repaying the loans would be an undue hardship.
10. EZ pass debts
11. Cash advances of more than $1,000 if taken out within 70 days before filing.
12. Debts due to fraud - this includes lying on a credit card application
13. Debts from judgments for driving while intoxicated.
14. Debts for larceny and embezzlement
● Am I judgment proof? - Some individuals have no assets that creditors can attach to. Individuals on social security that have no assets may not have to file Chapter 7 bankruptcy. Individuals should determine if a creditor can go after their money or assets before filing. If a creditor is barred from being able to collect, the individual may not have to file Chapter 7 bankruptcy.
● Am I eligible for a Chapter 7 Discharge? - Individuals who are not eligible for a discharge should not file. If an individual received a discharge in a previous Chapter 7 case less than 8 years ago, then they should consider other debt-relief options.
● If I file bankruptcy, will I be able to keep my property? - Many individuals can file Chapter 7 bankruptcy and keep their property. If an individual’s property is exempt, it won’t be sold off to pay creditors. Individuals who want to keep their property should determine if they can file Chapter 7 bankruptcy and keep their property safe from creditors. Individuals can file bankruptcy and typically keep the following property:
1. Motor vehicles; depending on the equity in the car
3. Household goods and furnishings
4. Personal effects
5. Household appliances
7. Tools of the trade and profession
8. Some real estate depending on the equity
9. Retirement money. I.e. pension, social security, etc.
● Am I being sued by debt collectors? - When individuals fail to pay their debts, creditors can begin lawsuits against them for the owed debt. When an individual fails to answer the lawsuit, a creditor will get a default judgment. Individuals who are being sued by a debt collector should never ignore a lawsuit. A default judgment allows creditors to garnish wages, levy bank accounts, and put liens on property. When an individual files Chapter 7 bankruptcy an automatic stay is initiated which prevents any creditors from continuing any legal actions. Individuals who are being sued or worried about a judgment should consider filing Chapter 7 bankruptcy.
1. Wage Garnishment - A wage garnishment allows creditors to contact an individual’s place of employment. The creditor will serve an individual’s place of employment with a wage garnishment order allowing them to take money for the debt directly out of their paycheck. This can be embarrassing and leave individuals who are already struggling in a worse financial position.
2. Bank Levy - A bank levy allows creditors to put a freeze on an individual's bank account. A freeze on a bank account only allows individuals to put money into a bank account but will not allow individuals to take the money out. Any savings in the account to pay bills will be taken to pay off the debt. Sometimes individuals are unaware of a levy on their bank account and end up not being able to pay their bills.
3. Liens on Property - When a creditor puts a lien on an individual’s real estate or personal property, they are given an interest in the property so they can get paid.
● Is my car being repossessed? - Individuals who fall behind on their car payments, run the risk of having their vehicle repossessed. When this happens, creditors will take the car back and then sue the individual for the deficiency amount. Individuals are often surprised to learn that even if they voluntarily give up their vehicle, creditors can still sue for the deficiency amount. Chapter 7 bankruptcy can allow this debt to be wiped away so that individuals are no longer liable.
● Do I have enough debt to file bankruptcy? - While there is no minimum amount of debt that is required to file a Chapter 7 bankruptcy, individuals should consider whether they can afford to pay back their debts or reach a solution outside of bankruptcy. Individuals who have little debt and can repay their debt should consider other options.
● Do I have cosigners that will be impacted? - Individuals who have friends or family who co-signed debts for them will still be liable for the debt even if the individual files bankruptcy on the debt. For example, if a relative co-signs a vehicle for an individual the relative will still be responsible to the creditor for the vehicle payments even if the debtor included the vehicle loan in the bankruptcy. Although the individual filing is no longer responsible for paying it, the creditor can go after the co-signer for the remaining balance.
Speak with a Bankruptcy Lawyer
Individuals trying to determine if Chapter 7 bankruptcy is the right choice for them should speak with a bankruptcy lawyer. A bankruptcy lawyer can examine an individual's financial situation and provide insight into whether filing a chapter 7 bankruptcy would be beneficial to their current situation. If Chapter 7 bankruptcy isn’t the right choice a lawyer may recommend filing Chapter 13 bankruptcy instead. The decision to file bankruptcy should never be taken lightly and individuals should do as much research as possible to ensure that Chapter 7 bankruptcy is the right decision.