How to File for Chapter 7 Bankruptcy

Also called liquidation or straight bankruptcy, Chapter 7 bankruptcy cancels most or all of your debts. Some of your property may be sold to repay your creditors as well. You can only qualify to file for Chapter 7 if your income is below the state median or you don't have sufficient disposable income after expenses. The process for Chapter 7 bankruptcy takes between four and six months and costs $335 in filing and administrative fees.

Requirements for Chapter 7

Not just anyone can file for Chapter 7 bankruptcy. In 2005, a federal act made eligibility requirements stricter in an effort to curb bankruptcy filing abuses. The law introduced a means test to determine who can file for Chapter 7. There are also some debts that can’t be discharged in a Chapter 7.

Means test: Your income is one factor that determines if you can file for Chapter 7 bankruptcy. The means test is designed to prevent high earners from filing Chapter 7 and instead file for Chapter 13 bankruptcy that requires debt repayment. If your income is below the median for your state, you qualify for Chapter 7 bankruptcy. If your income is higher, you must demonstrate that your disposable income is insufficient to pay back your debts under a Chapter 13 filing. The federal government offers two forms to help you determine if you qualify for Chapter 7 bankruptcy.

  • Form 122A-1: The form calculates whether your income falls below your state’s median income. If it does, you qualify and don’t need to fill out the other the second form.
  • Form 122A-2: This The form calculates your disposable income and whether it’s enough for debt repayment under Chapter 13.
Unqualified debts: The primary reason for Chapter 7 bankruptcy is to eliminate burdensome debts, so you can have a clean slate and a new start. After the debt has been discharged, you are no longer liable to pay back the debt. But there are several types of debts or payment obligations that can’t be discharged by bankruptcy. If most of your debts aren’t able to be discharged, you may want to consider other options besides bankruptcy to deal with your debt.

Debts not qualified under Chapter 7 bankruptcy

  • Alimony and child support
  • Some student loans
  • Some taxes
  • Secured loans
  • Debts after bankruptcy is filed or some incurred in previous six months
  • Loans obtained fraudulently
  • Debts from personal injury while driving intoxicated
  • Debts from willful and malicious injuries to person or property

Secured debts: If you are not current on payments on your secured debt—such as a mortgage or car loan—you will likely lose that property in Chapter 7 bankruptcy.

Exempt property: The appointed trustee in a Chapter 7 bankruptcy will sell off nonexempt assets to pay your creditors. But federal law allows you to protect some property from creditor claims. Many states have adopted their own exemption laws that supersede federal exemptions. In other states, you can choose which exemptions—federal or state—to follow in your bankruptcy. Consult with a bankruptcy attorney to find out what the exemption laws are in your state. Below are a list of the more common federal exemptions.

Federal property exemptions:

  • Primary residence: $23,675 in equity
  • Motor vehicle: $3,775
  • Jewelry: $1,600
  • Household goods (furniture, appliances, clothes, etc.): $12,625 total ($600 per item)
  • Tools of the trade (implements and books): $2,375
  • Life insurance: $12,625 in loan value, accrued dividends, or interest
  • Wildcard exemption: $1,250 plus $11,850 of any unused portion of your house exemption for any property you choose

Federal exemptions for financial support or benefits:

  • Spousal support and child support that you need
  • Life insurance payments that you need
  • Social security benefits, unemployment benefits, veteran’s benefits, public assistance, and disability or illness benefits
  • Retirement accounts ($1,283,025 cap on IRAs and Roth IRAs)

Secured debt: While there are exemptions for secured property—such as homes and cars—there are cases when your property’s value exceeds those exemption amounts. In those cases—and if you are current on payments—you can surrender the property to pay off creditors; reaffirm the debt and continue to pay it after the bankruptcy; or redeem it by paying the creditor the replacement value of the property. If you are delinquent on these payments, you lose your home or other property.

Nonexempt property includes luxury items such as pleasure boats, collections, expensive artwork, and vacation homes. Many states protect wedding rings up to a certain amount, but other fine jewelry like premiere watches, diamond necklace, or antique broaches are not exempt. These nonexempt property will be sold to pay off debt.

What Do You Need to File Chapter 7?

Credit counseling: Before you can file for Chapter 7 bankruptcy (or Chapter 13 bankruptcy), you must complete a mandatory credit-counseling course by phone, in person or online within 180 days before filing for bankruptcy. The goal of the session is to determine if there is another feasible way to handle your debt burden without filing for bankruptcy and without adding to what you owe. Even if the counseling agency comes up with a feasible repayment plan, you don’t have to accept it. But you must file the plan and a certificate showing you completed the session with your bankruptcy documents. Non-profit credit counselors may charge a reasonable fee for the session that can be waived if you don’t make enough money.

Chapter 7 Documents

You’ll be required to fill out several dozen pages of forms that list your property, debts, income, expenses and information on transactions from the previous two years. You will need to provide a list of your creditors and document any debts you are disputing. Your trustee will also need a copy of your most recent tax return and possibly other documents. Filing your claim starts the process. Most people file all the forms at once, but you can also file a two-page form to start the process and file the rest of the forms within 14 days. Here are the most common forms you will need to fill out:

  • B 106: Summary of Your Assets and Liabilities and Certain Statistical Information
  • B 106A/B Schedule A/B: Property
  • B 106C Schedule C: The Property You Claim as Exempt
  • B 106D Schedule D: Creditors Who Hold Claims Secured by Property
  • B 106E/F Schedule E/F: Creditors Who Have Unsecured Claims
  • B 106G Schedule G: Executory Contracts and Unexpired Leases
  • B 106I Schedule I: Your Income
  • B 106J Schedule J: Your Expenses
  • B 107: Your Statement of Financial Affairs for individuals Filing Bankruptcy
  • B 108: Statement of Intention for Individuals Filing Under Chapter 7
  • B 121: Your Statement About Your Social Security Numbers
  • B 122A-1: Chapter 7 Statement of Current Monthly Income

You may need to fill out these next forms depending on your particular case:

  • B 101B: Statement About Payment of an Eviction Judgment Against You
  • B 106H: Schedule H: Your Co-debtors
  • B 106J-2: Schedule J-2: Expenses for Separate Household of Debtor 2
  • B 122A-1: Supplement Statement of Exemption from Presumption of Abuse (This is needed if you qualify for an exception to the means test.)
  • B 122A-2: Chapter 7 Means Test Calculation (This is needed if your income is above the state median income.)

Bankruptcy Fees

The courts charge a $245 filing fee, a $75 administrative fee, and a $15 trustee surcharge. The fees typically must be paid to the clerk of the court when filed. But you can pay in four installments if you receive court permission. If your income is less than 150% of the poverty, defined by the Bankruptcy Code, and you can’t pay the fees, even in installments, the court may waive the fees. You will need to file the following forms if you requesting to pay in installments or a fee waiver.

  • B 103A: Application for Individuals to Pay the Filing Fee in Installments
  • B 103B: Application to Have Chapter 7 Filing Fee Waived

What Happens After Your Chapter 7 Filing?

Thirty days after you file, you will attend a creditors’ meeting conducted by the trustee. This is generally the only required appearance you have to make for your filing. You must answer under oath the trustee’s questions about any information in your filing or provide any additional information the trustee requests. You don’t need a lawyer; creditors usually don’t attend; and the meeting takes less than 10 minutes to complete.

You are required to attend a budget counseling session, either by phone or online, no later than 60 days after the creditors’ meeting. Once completed, file a form with the court along with a certificate of completion from the counseling agency.

The court will send its written discharge of your debts typically 60 to 75 days after the creditors’ meeting. Until then, don’t sell any property or make any moves on your debt without the trustee’s permission. The trustee will also sell any nonexempt property during this time.

Credit Score: A Chapter 7 bankruptcy stays on your credit report for 10 years from the filing date. Any accounts in good standing included in a bankruptcy remain on your credit history for seven years from the filing date, while delinquent accounts stay on your report for seven years from the original delinquency date. After your bankruptcy is discharged, pull your credit reports from Equifax, Experian and TransUnion to verify that your lenders are accurately reporting the discharge. Only debts included in the Chapter 7 bankruptcy filing should be reported as discharged with a zero balance. Make sure to wait until your bankruptcy is discharged before applying for new credit. But remember that a bankruptcy will hurt your credit score for a long time after the filing, making it harder to qualify.

Chapter 7 Versus Chapter 13

Chapter 7 bankruptcy is designed for lower-income consumers with little to no assets and who can’t feasibly pay off their debts in the next three to five years. But there is another bankruptcy option called Chapter 13, also known as a reorganization plan. This type of bankruptcy is designed to help you pay back all or a portion of your debts through a three- to five- year repayment plan. To qualify, you can’t have more than $394,725 of unsecured debt or $1,184,200 of secured debt. Typically, those who don’t pass the Chapter 7 means test will file for a Chapter 13 instead. But there are other reasons to consider a Chapter 13 over a Chapter 7.

If your debts are ones that can’t be discharged under a Chapter 7 bankruptcy—such as alimony and student loans—then Chapter 13 may be the only option left. Or, if you want to keep your house or car, but their values exceed the Chapter 7 exemption, Chapter 13 may be your only way to avoid foreclosure or repossession. Chapter 13 also provides allows you to get back on track if you’re behind on your mortgage or car payments. You can also keep nonexempt property—such as a nice car, valuable art or expensive jewelry—in a Chapter 13 that you would otherwise have to sell in a Chapter 7.

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