Chapter 7 bankruptcy is one of the most popular forms of bankruptcy and for a good reason – it can allow individuals and families to wipe out most of their debts.
What Is Chapter 7 Bankruptcy?
Also referred to as a straight or liquidation bankruptcy, the individual’s assets are sold off, or liquidated. The proceeds are then used to pay off the creditors. In a Chapter 7, the court may allow any assets with equity to be liquidated. If you have no equity you will keep your assets. Since many people do not any equity in their cars and in many homes, they get to keep those and wipe out the other debts.
Who Can File for Chapter 7?
Both business and individuals can file for Chapter 7 bankruptcy, although it is far more popular among individuals. One of the reasons for this is because it allows the individual to wipe out all, or a significant portion, of their debts. But not all individuals can file. Those who have filed for bankruptcy in the past six to eight years are not eligible to file for Chapter 7. Additionally, those who have the financial means to pay back at least some of their debts will not qualify for liquidation bankruptcy.
Qualifying for Chapter 7 Bankruptcy
Chapter 7 sounds great in that it can allow an individual to avoid paying back most debts. But not everyone is eligible for it.
Before being granted, the individual must pass something called the “means test.” This test looks to see if the individual makes enough money to pay back his or her debts. If they do have enough money, they aren’t eligible, but must instead file for Chapter 13 bankruptcy.
Whether an individual can pass the test will depend on the individual’s income. A general rule of thumb is that if the individual’s income is lower than the median income of where you live, they will pass the means test. If the individual’s income is higher than the median income of where you live, they may still be eligible to file for Chapter 7 bankruptcy, but they’ll need to provide additional information about their expenses.
What Else Is There to Know Before Filing?
There are two important pieces of information to keep in mind. Firstly, secured debts (such as most car loans and home mortgages) are not dischargeable. However, this does not mean a person will automatically lose a car or home. Each state has a list of exempt property, which may allow the individual to hold onto a car or home as long as they stay current on the payments. If you have no equity in your house or car, you may be able keep these assets so long as you remain current on your payments.
Secondly, a Chapter 7 bankruptcy will remain on your credit report for ten years from the date you file for bankruptcy. A Chapter 13 bankruptcy will only stay on your credit report for seven years.
To learn more about Chapter 7 and to get help determining whether it’s the best option for you, give me a call at (678) 888-1778 or contact me online now.