Chapter 7 Bankruptcy
Chapter 7 is the most common type of bankruptcy, accounting for upwards of 70% of the personal bankruptcies filed in the U.S. each year. It takes only 4-6 months from start to finish, and, at the end, the court will discharge virtually all of your consumer debts, including your credit card debt. This means you will have no further obligation to repay these debts.
Not all of your debts will be discharged, however. Neither Chapter 7, nor any other type of bankruptcy discharges the following types of debts:
- Back income taxes you owe the IRS or your state
- Student loan balances
- Alimony and child support obligations
- Judgments for motor vehicle deaths or injuries you caused while driving under the influence of alcohol or drugs
- Restitution debts ordered by a criminal court
Not only does Chapter 7 discharge almost all of your consumer debt, it also features an automatic stay. Once you file, your creditors must immediately stop harassing you by phone, email, snail mail or any other way for repayment of your debts. Chapter 7 also stops foreclosure actions. However, it only forestalls foreclosure, not eliminates its possibility. Consequently, if your main reason for filing bankruptcy is to save your home from foreclosure, you probably would do better to choose Chapter 13 rather than Chapter 7.
Unless you are a disabled veteran, you must pass a means test in order to qualify for Chapter 7. Each state has its own guidelines for the maximum amount of net income you can have to be eligible for filing Chapter 7. Each state’s means test has two steps: 1) determining your average monthly gross income for the six months preceding your bankruptcy filing and deducting allowable expenses, and 2) then comparing your net income with the state’s median income level for a household of your size. If your income falls at or below the median, you qualify for Chapter 7.
Keep in mind that your income doesn’t just mean the salary or wages you earn. It also includes such things as the following:
- Child and spousal support payments you receive
- Pension, retirement and annuity payments
- Workers’ compensation payments
- Unemployment compensation payments
- State disability payments
- Interest, dividends and royalties
- Rental income
While the Bankruptcy Code does not require you to hire a bankruptcy lawyer to represent you during bankruptcy, you would do well to do so. He or she can not only help you decide if Chapter 7 is right for you, but also guide you through the entire process, making sure all your paperwork is properly filled out and filed on time.