Struggling with debt and don’t know what to do? Chapter 7 bankruptcy might help.
But is it the right choice?
This guide breaks down what Chapter 7 is, how it works, and what to expect. If you’re thinking about filing, a Chapter 7 Bankruptcy attorney can help you through the process.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a way to get rid of most debts. It’s often called liquidation bankruptcy. While a court-appointed trustee may sell some of your property to pay off creditors, bankruptcy exemptions permit most people to keep all of their possessions. The process usually takes four to six months.
How Chapter 7 Works
It’s designed for people who can’t afford to pay their debts. Here’s what happens:
- You file a petition in court.
- The Automatic Stay immediately applies and prohibits creditors from calling, suing, or garnishing wages.
- A trustee reviews your assets.
- Once approved, most debts are wiped out.
Who Can File for Chapter 7?
Not everyone qualifies. Here are the main rules:
- Individuals and businesses can file.
- The Means test applies. If your income is lower than your state’s median, you qualify. If it’s higher, more calculations are needed.
- No recent bankruptcy filings. If you had a Chapter 7 discharge in the past eight years or a Chapter 13 discharge in six years, you can’t file.
- No fraud. Hiding assets or making shady transactions can get your case thrown out.
Chapter 7 Filing Process
The filing process feels stressful, but breaking it down makes it easier.
You compare your income to the state median. If it’s lower, you qualify. If it’s higher, you might still qualify after more calculations.
2. Complete Credit Counseling
You have to complete credit counseling courses before and after filing for bankruptcy protection. Find an approved credit counseling agency to complete the courses.
3. File Petition
You’ll file and provide the bankruptcy trustee with a list of required documents, e.g., tax returns, pay statements, bank statements, and other required documents.
4. Automatic Stay Begins
After filing, the Automatic Stay goes into effect and makes it illegal for your creditors to harass you with phone calls, emails, mail, and text messages.
5. A Bankruptcy Trustee is Assigned
The court appoints a Trustee to review and administer your case.
Dischargeable vs. Non-Dischargeable Debts
While some debt can’t be wiped out, Chapter 7 bankruptcy eliminates many types of debt. You must know which debts can and can not be discharged.
Debts That Can Be Discharged:
- Credit cards
- Medical bills
- Personal loans
- Utility bills
- Some lawsuit judgments
Debts That Cannot Be Discharged:
- Child support and alimony
- Most student loans
- Recent tax debts
- Court fines and criminal penalties
Impact on Assets and Property
Some assets are protected, and some are not.
Exempt Assets (You Can Keep):
- Household items and clothing
- 100% of Pension, IRA, 401K, and money in checking and savings up to a certain exemption amount
- A car, up to a certain exemption amount and If the payments are current
- Your primary home (depending on state laws)
- Tools needed for work
Non-Exempt Assets (May Be Sold):
- Second homes or vacation properties
- Expensive jewelry and collectibles
- Luxury cars or boat
Advantages and Disadvantages of Chapter 7
Pros:
- The process is usually completed in four to six months and gives you a fresh start quickly.
- The automatic stay immediately stops creditors calls, lawsuits, and wage garnishments.
- You don’t need to make payments to creditors in a payment plan; instead, most debts are erased.
Cons:
- Some non-exempt assets can be sold to pay to creditors. You could lose your valuable belongings.
- Bankruptcy stays on your credit report for up to 10 years. It becomes difficult to get new loans or credit lines.
- There are some debts, such as student loans and child support, that still need to be paid even after filing.
Other Debt Relief Options
If Chapter 7 doesn’t work for you, there are other ways to manage debt.
Chapter 13 Bankruptcy
If you have stable income, want to save your assets from being sold, and need additional time to pay debts, Chapter 13 gives you the flexibility to keep your property by entering into a repayment plan lasting three to five years.
Is Chapter 7 Right for You?
Ask yourself:
- Are you overwhelmed with debt and unable to keep up with payments?
- Is your income too low for a repayment plan?
- Do you have few valuable assets at risk?
If you answered yes, Chapter 7 could be a good option. But before deciding, talk to a legal professional who understands Pennsylvania bankruptcy laws.
Final Thoughts
While chapter 7 bankruptcy may be a fresh start for you, It’s important to understand the process and its impact before making a decision. Filing without proper guidance could put your assets at risk.
A legal expert can help ensure you navigate bankruptcy correctly and set yourself up for a successful financial future.
Not sure if Chapter 7 is right for you? Schedule a free consultation today with an experienced Pennsylvania bankruptcy attorney and get the guidance you need.