If you find yourself in a sticky financial situation where you’re facing mountains of debt with no realistic way to catch up, you have a limited number of options. And while it might sound like a scary word, bankruptcy is one of them.
What is Chapter 7 Bankruptcy?
Bankruptcy is a legal financial maneuver that allows you to either reduce or eliminate your debt when you’re no longer able to repay the amount you owe. And while it’s a “last resort” option, it offers a number of distinct benefits to those who take advantage of it.
There are two major types of bankruptcy that individuals use: Chapter 13 (known as “reorganization bankruptcy”) and Chapter 7, which is the method we’ll be discussing in this article.
Chapter 7 bankruptcy is commonly referred to as “liquidation bankruptcy.” It involves selling some or all of the property you own to pay off your debts. People who file for this form of bankruptcy typically have limited income and may not own a house.
However, it can also be used if you owe a significant amount on your house and are willing to lose the house to foreclosure but don’t want to get stuck with a deficiency. (Chapter 7 bankruptcy will wipe out all of the mortgage debt, meaning you don’t get stuck owing the difference between your balance and the auction price.)
When there’s a choice, most people prefer to file Chapter 7 bankruptcy over Chapter 13 (which is a much longer process and requires monthly payments spread out over the course of many years). Here are several reasons why:
• No limitations. Unlike with Chapter 13 bankruptcy, which has limitations on the amount of debt you can have, there are no limits with Chapter 7 bankruptcy. This makes it an ideal choice for those with high debt that feels insurmountable.
• Chapter 7 bankruptcy is usually a fairly quick and efficient process, lasting anywhere from three to six months (depending on different factors involved).
• Fresh start. Once Chapter 7 bankruptcy is filed, virtually all debts are cleared (except for student loans, child support, and certain taxes).
• Keep future income. In the majority of cases, any income you acquire after filing for Chapter 7 is not included in the bankruptcy estate. There are exceptions to certain forms of property acquired within six months of filing (like inherited property or proceeds from life insurance policies), but most future income is safe.
Nobody ever wants to find themselves in a situation where they have to file for bankruptcy. However, if you do, Chapter 7 can provide significant financial relief.
Who Qualifies for Chapter 7 Bankruptcy?
While Chapter 7 bankruptcy is certainly preferred to Chapter 13 in most situations, not everyone qualifies for this option. Only people who pass something known as the “means test” are eligible for relief.
“In order to pass the means test, you must show that your household income is under the median income level for your specific household size,” bankruptcy attorney Devin Sawdayi mentions. “If your income is above this threshold, meaning you earn ‘too much income,’ you can still qualify for Chapter 7 if you are able to pass another series of ‘tests.’”
Even then, should you be lucky enough to earn ‘too much income’ such that you do not qualify for a Chapter 7 , you can still file a Chapter 13. Under Chapter 13, you may be able to still pay your creditors pennies on the dollar and avoid all interest charges on your unsecured debts.
How to File for Chapter 7 Bankruptcy
While it’s technically possible to file for Chapter 7 bankruptcy on your own, it’s highly recommended that you hire legal assistance to facilitate this important process. There is a list of documents that you’ll need to fill out and file, which can be very confusing and time-consuming if you aren’t well-versed in bankruptcy law. It’ll cost you some money to retain a bankruptcy lawyer, but in the end, it’s money well spent.
Get Relief From Your Debt
Debt is stressful. It weighs on you financially, emotionally, and even physically. Thankfully, Chapter 7 bankruptcy is an option for those seeking relief. If you believe that you’re a good candidate, it would be wise to consult with an attorney to learn about the different methods available to you.