Finance

What to Expect & How Bankruptcy Works

Filing for bankruptcy is never an easy choice.

But sometimes, it can feel like the only way to escape the vice grip of debt and move on with life.

Most personal bankruptcy filers will turn to a Chapter 7 bankruptcy, which offers almost total debt forgiveness and a quick discharge time.

But before you can get a fresh start from a Chapter 7 bankruptcy, you should know the basics — and what to expect from the bankruptcy process.

What Is Chapter 7 Bankruptcy?

In researching your options, you’ll find there are two common types of bankruptcy for individuals and couples: Chapter 7 and Chapter 13. While similar in many ways, they differ in some big areas.

Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” is a bankruptcy by which individuals or couples who are deemed to not have a high enough income to pay back debts can absolve themselves through liquidating their assets. You can include both secured debts and unsecured debts.

If the liquidation doesn’t cover the entire debt, then the remaining balance is typically forgiven.

Chapter 13 bankruptcy, also known as “wage-earner bankruptcy,” is for those whose income or other qualifiers make them ineligible for Chapter 7.

These individuals or couples will work with a trustee to create a payment plan lasting three to five years to repay most of their debt, and they won’t have to liquidate any assets unless they choose to.

Of the two, Chapter 7 is by far the most popular. Here’s how to determine if you qualify and how to file.

Pro Tip

A Chapter 7 bankruptcy can discharge a wide array of debt — credit card debt, tax debts, medical bills, personal loans, payday loans, even some types of student loans.

Before You Can File for Chapter 7 Bankruptcy

Before you file, you’ll have to determine if you qualify for Chapter 7 bankruptcy. Seeking professional advice from a bankruptcy attorney is the only real way to determine your eligibility, but if you haven’t committed to getting one yet, here’s what they’ll look for.

The Means Test

Because the basis for Chapter 7 bankruptcy is not having the means to pay your debts, the first step in the process is a “means test.”

The means test is a form you’ll file with information on your income, expenses and family size to determine whether you have enough disposable income to repay your debts.

If your income falls below the median income for your state and family size, then you’re more likely to qualify. If not, it’s still possible you can qualify. You’ll have to report your last six months of “necessary” expenses to show that the money left over — your disposable income — isn’t enough to make your debt payments.

Credit Counseling

You’ll have to participate in a pre-bankruptcy counseling session with an approved credit counseling agency. The U.S. Department of Justice provides a list of approved credit counseling agencies in each state, but you can also do it online or over the phone.

This session is meant to give you an idea as to whether you really need to file for bankruptcy or if an informal repayment plan would be better. It’ll also help you with budgeting in hopes that you won’t repeat the bankruptcy process in the future.

The fee for this credit counseling session can range from $25-$50 and lasts 90-120 minutes.

Bankruptcy History

The last thing that can make you ineligible for filing is your history with bankruptcy. You’re ineligible to file if you’ve had another bankruptcy case dismissed within the last 180 days.

You’re also ineligible for discharge if you’ve had debt forgiven in a previous Chapter 7 bankruptcy case in the past eight years or a Chapter 13 case in the past six years.

How Much Does a Chapter 7 Bankruptcy Cost?

Once you’ve checked those three boxes, then you’re ready to file. But be prepared for the costs. The initial filing fee for Chapter 7 is $338 as of 2022.

If you can’t afford the fee, you can either ask the bankruptcy court to split it into four payments or apply for a fee waiver when you’re submitting your initial bankruptcy petition. You’re usually only eligible for a fee waiver if your household income is at least 150% below federal poverty guidelines.

You’ll also need to pay a bankruptcy attorney, which can cost anywhere from $500 to $3,500, depending on where you live.


Pros

  • Over sooner
  • No impact on wages
  • Keep your house and car
  • Support payments may be dismissed
  • No debt limit


Cons

  • Damage to credit
  • May forfeit house or car
  • Loss of property
  • Other debt and payments remain

Pros and Cons of Chapter 7 Bankruptcy

The upside to Chapter 7 bankruptcy is great. You can get much of your debt discharged and be able to start fresh. Other pros include:

  • Chapter 7 bankruptcy can be completed in three to six months (versus three to five years for Chapter 13 bankruptcy.)
  • You get to keep all your salary and wages after you file.
  • Most states allow you to keep your home and car, especially if you’re current on payments.
  • Chapter 7 bankruptcy can aid in getting a family court order to dismiss child support and alimony payments.
  • There’s no debt limit to qualify.

The major downside to Chapter 7 bankruptcy is obvious: potentially having to give up many of your treasured things. But there are other drawbacks you may not think of.

  • It will ruin your credit and stay on your credit report for up to 10 years.
  • If you’re behind on your mortgage or car payments, then you will likely have to forfeit them.
  • You’ll lose any luxury possessions and nonexempt property you own.
  • It won’t automatically absolve you of the responsibility of alimony, child support or repaying student loans and mortgage liens.

If you owe far more than your assets and/or property are worth, Chapter 7 bankruptcy could make financial sense.

Still, while some of your property won’t be taken and sold to repay creditors, much of it will be. Chapter 7 bankruptcy might be better for renters who don’t stand to lose their homes or for others with few assets.

Filing for bankruptcy can also be an emotional decision for many people. Take that into consideration when you’re making your own decision.

How to File Chapter 7 Bankruptcy

Once you’ve determined your eligibility and counted the costs, things really get moving. Here’s a step-by-step guide to the process, whether you hire an attorney or not.

1. Find a Bankruptcy Attorney

When you’re struggling financially, the added expense of a bankruptcy attorney can feel like just one more thing you can’t afford. But Chapter 7 bankruptcy has long-reaching legal and financial impacts, the process can be complicated and you may only get one shot at getting it right.

Paying an expert to guide you through the bankruptcy process can be money well spent. You can represent yourself in your Chapter 7 bankruptcy though.

2. File Your Formal Petition

Your formal Chapter 7 bankruptcy petition includes submitting many bankruptcy forms and your filing fee or waiver application to your local bankruptcy court.

3. Submit Documents to a Bankruptcy Trustee

You’ll need to submit proof of the information you submitted in your initial petition to your bankruptcy trustee. The trustee will be in charge of executing your bankruptcy. They’ll round up your property, sell it, challenge creditors if needed and monitor your eligibility for Chapter 7 throughout the proceedings.

3. Attend the Meeting of Creditors

You’ll attend one meeting with your trustee and creditors after filing. You and your trustee will review the documents you sent them with the creditors, and they will, in turn, inquire about your finances and property.

That’s usually the end, unless there’s a need for more investigation or documents, in which case your trustee will schedule another meeting.

Be aware that if you don’t show up to your meeting, the court will dismiss your bankruptcy case.

4. Take the Debtor Education Course

To get your discharge, you’ll have to take one more course called the Debtor Education Course, which you may do earlier in the process. This one is about two hours long and can usually be taken with the same agency you did your pre-bankruptcy counseling with.

You won’t want to procrastinate on this. You only have 60 days after your initial meeting of creditors to file your completion certificate with the court.

Failing to file your completion certificate will cause the court to dismiss your case, and you’ll have to pay the filing fee again to reopen it. You’ll also probably have to file an extra petition requesting they accept the late certificate.

5. Get Your Discharge

Once you’ve followed the steps, the court will officially discharge your qualifying debts and close your case.

Be sure to hold onto your discharge order, because while creditors will no longer have any claim to your debt, some may still try to come for it. All you’ll have to do is send them a copy of that discharge order to get them off your back.

What to Expect After You File Chapter 7 Bankruptcy

Between filing and discharge, there are a few events you should look out for.

Automatic Stay

Once you file bankruptcy, creditors and collectors will have to stop trying to collect their money while the case plays out. That’s called an “automatic stay.”

If a company continues to try to collect during the stay, it’s violating a court order. Let the company know in writing, and the collections will likely stop. If they don’t, notify the bankruptcy court, and they’ll likely pursue litigation against the company.

Seizing of Assets

Your trustee will handle all of this for you. In the unlikely case your home is one of those assets, the trustee cannot come over without first consulting you. And if there’s any disagreement as to what is included in the bankruptcy estate, you or your attorney can file bank forms to dispute.

Receiving Reaffirmation Agreements

For secured debts that you want to hold onto — usually your primary mortgage and car loans — you’ll have to sign a reaffirmation agreement for each debt, which will waive the discharge of that particular debt. These will be sent to your attorney and will have to be signed by both you and the creditor before you receive your discharge order.

Jen Smith is a former staff writer at The Penny Hoarder and author of “Meal Planning on a Budget.” She gives money-saving and debt-payoff tips on Instagram at @modernfrugality.

Senior editor Johna Strickland contributed.




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