The decision of whether or not to file for bankruptcy can be a difficult one. Individuals considering Chapter 7 bankruptcy are already in financial hot water, so gaining a full understanding of what this type of bankruptcy entails is crucial to weighing the short and long-term consequences and benefits before filing.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, also called “straight” or “liquidation” bankruptcy, is a process that can discharge most debts and is designed to earn an individual a fresh start to financial responsibility. Of the different types of personal bankruptcy, Chapter 7 bankruptcy is the most common. It is the simplest type of personal bankruptcy, and unlike Chapter 13 (the other common personal bankruptcy), it doesn't require filers to pay back any portion of their debts.
(To get an understanding of what bankruptcy can and cannot do, see How Bankruptcy Works).
Steps in a Typical Chapter 7 Case
Paperwork and Eligibility
The process of filing for Chapter 7 bankruptcy begins with filing various papers with the bankruptcy court.
The filer must prove that he is unable and ineligible to file a reorganization or repayment plan. A person must perform two income tests - the median income test and the means test. If he fails either one, the petition will be dismissed.
The debtor must also provide an accurate and complete list of all assets, as they will be accessible to the court. Items to be included in the required documents are property, current monthly income and living expenses, debts, exempt property, any property owned and money spent during the two previous years and property sold or given away within the two previous years.
Court Hearing – “Meeting of Creditors”
Next, a creditor meeting will be scheduled during which assets to be liquidated, partial repayments of debt and any fraudulent activities may be discussed. Creditors can refuse to cancel debt if they believe that it was incurred due to fraudulent or unlawful activities.
It should also be noted that student loans, taxes, fines owed to government agencies and family support cannot be excused with the filing of Chapter 7 bankruptcy.
Costs and Other Considerations
The entire Chapter 7 bankruptcy process typically takes about four to six months, and costs about $299 in filing and administrative fees. An individual will not be able to file if he already received a bankruptcy discharge within the last six to eight years, or if he could complete a Chapter 13 repayment plan with relative ease. A person who files for Chapter 7 bankruptcy will be required to attend credit counseling, and it may be difficult to obtain credit cards or mortgages because bankruptcy remains on credit reports for ten years.
Getting Help with Your Case
Filing is relatively simple; however the process can become quite complex depending on each respective situation. Although spending even more money on an attorney can sound burdensome when so much debt has already been incurred and it is possible to file bankruptcy on your own, speaking with a lawyer is always recommended. (Learn more about Getting Help with Bankruptcy).
A typical do-it-yourself bankruptcy consists of 50 to 100 pages, and sometimes more. A debtor whose case is dismissed for failure to file a required document, such as a credit counseling certificate, may lose the right to file another case or lose protections in a later case. Without legal representation at hearings an individual will need to negotiate on their own without the proper training, making it incredibly difficult to negotiate with creditors.