How Chapter 7 Works
You often hear the words “fresh start,” in connection with bankruptcy. The reason is that legislators recognized that at times, people need a chance to regroup and start over. Chapte 7 gives clients an opportunity to do just that. Whether a client has lost a job, gone through a divorce, is dealing with an illness, or is just realizing that they might be in over their head, chapter 7 allows them to walk away from their debt completely and start over.
In 2005, Congress changed the way people qualify for chapter 7. A criteria called the means test was created to determine whether a debtor had sufficient income to pay some portion of their debt back as part of a chapter 13 bankruptcy plan. To be eligible for a chapter 7, a client must fall below certain income limits. The income limits increase depending on the size of your family. Some clients are eligible for a chapter 7 because their annual income is below the median income limits. Other clients are eligible to file chapter 7 because the majority of the their debt is business debt. When this is the case, the means test does not apply.
So what happens when you file for chapter 7? The law allows eligible clients to discharge almost all types of debt. This includes credit card bills, pay day loans, medical bills, other unsecured loans, most judgments, pending law suits. Creditors have to stop trying to collect. That means no more annoying phone calls. Most debts are covered and can be discharged. There are a few exceptions. You can’t discharge debts owed to the IRS, student loan debt, and a few other unique types of debts.
Clients often ask whether they can file chapter 7 and still keep their home or vehicles. The answer is yes. If you can afford to pay your house payment and car payment, you can generally keep those assets. You have to be current on those payments or able to get current soon after filing for relief. If you can’t get current, you can surrender the asset as part of the chapter 7 and the creditor can’t come after you for anything you still owe on the debt.
Filing for bankruptcy is never an easy decision. Bankruptcy negatively impacts your credit score and can remain on your credit report as long as ten years. Even with those negative consequences, chapter 7 can be the right decision when you feel like you’re drowning under an ocean of debt. Just like any major decision, you need as much information as possible. If you think chapter 7 might be an option you should consider, give us a call. Your consultation is always free and we can help you figure out what the best next step is for you and your family.