The general impression of Chapter 7 bankruptcy is that it’s a resolution to crushing debt, enabling you to make a fresh start without the burden of overwhelming financial obligations. This is true to a certain extent, but there’s much more to the legal proceedings that you need to understand before filing. The eligibility rules are strict and complicated, possibly eliminating the option of debt liquidation. Even if you do qualify, there are serious long-term consequences that you must balance with regard to your future. Plus, you need to keep in mind that these laws are designed to protect your creditors just as much as your own interests. Based upon these factors, it’s critical to consult with a Cleveland Chapter 7 bankruptcy lawyer about the process.
At Luftman, Heck & Associates, we understand that many unfortunate circumstances lead people to consider bankruptcy. We’re here to provide the advice you need to make an informed decision about your future, and we’re with you every step of the way during bankruptcy proceedings. Please call (216) 586-6600 to set up a consultation with a Chapter 7 bankruptcy lawyer, and read on for some background information about the process.
Overview of Chapter 7 Bankruptcy
Otherwise known as “liquidation” bankruptcy, Chapter 7 involves appointment of a trustee who will take control over some of your assets and sell them to satisfy your debts to creditors. If there’s not enough to pay all amounts you owe, all of your remaining debt is discharged. Only nonexempt assets can be sold by the bankruptcy trustee, and Chapter 7 applies to most unsecured debt, such as:
- Unpaid medical bills;
- Credit card accounts; and,
- Personal loans and lines of credit.
The Chapter 7 bankruptcy process itself is relatively straightforward and can be completed in around 4-6 months. However, the eligibility rules are extremely strict and not all debtors will qualify.
Reasons to Consider Chapter 7
Overwhelming debt is the primary reason people opt to file for bankruptcy, but that’s not the end of the analysis. You must understand the benefits of Chapter 7 and whether you can take advantage of them. For instance:
- Upon filing your bankruptcy documents, your creditors are prohibited from taking collection action. The calls, letters, and attempts at wage garnishment will stop.
- If you can’t make your minimum monthly payments, you’re caught in an unending cycle. You can’t pay, so you incur late fees and interest – which you’re also unable to pay the following month. Your balance never goes down, and your credit suffers. Chapter 7 bankruptcy eliminates the vicious cycle for certain debts.
- If you’re facing foreclosure or repossession of a vehicle, there are options for you to keep these assets through Chapter 7. The debts aren’t discharged, but they won’t be sold by the trustee.
Of course, you’re probably aware of the most important drawback of Chapter 7 bankruptcy. Your credit rating takes a major hit that may take up to 10 years to resolve. A Chapter 7 bankruptcy lawyer can help you weigh all the crucial pros and cons, so you know you’re making the right decision for your circumstances.
Eligibility and the “Means” Test
Even if you believe Chapter 7 is a wise decision, you must still meet the rigid qualifications established by the US Bankruptcy Code. The basic eligibility rules involve your recent history with bankruptcy. You’re ineligible if you completed Chapter 7 or Chapter 13 bankruptcy proceedings in the last eight or six years, respectively. Plus, you don’t qualify if you filed for Chapter 7 or Chapter 13 within 180 days prior, and the case was dismissed for certain types of misconduct.
However, the qualifications for Chapter 7 become much more complex after these basics. The analysis turns to the “means” test, which is an assessment of your financial condition. The means test factors include:
- State Median Income: Your income must be lower than the household median in your state of residence, based upon the number of people living in the residence.
- Disposable Income: Even if you make above the median, you may still qualify when looking at the income you have left after paying monthly bills for living necessities. You could be eligible if your disposable income is below a designated amount.
This summary doesn’t go into the full details or calculations regarding the means test, which are very complicated. To avoid critical errors in determining your eligibility, you should trust a Chapter 7 bankruptcy lawyer.
Basic Steps to the Chapter 7 Bankruptcy Process
An attorney can provide specific information on Chapter 7 proceedings and will handle many of the legal tasks involved at different stages, including:
It’s your responsibility to participate in a credit counseling session with a court-approved agency within 180 days before filing for Chapter 7.
Filing Chapter 7 Forms
The main document is a petition for Chapter 7 bankruptcy, along with supporting forms that you must include. You’ll need to provide information on your property, income, monthly expenses, and debts. You must also list property you sold or gave away within two years before filing.
As of the filing date, Chapter 7 imposes a sort of moratorium on the actions of your creditors. They cannot attempt to collect what you owe, so there will be no action regarding wage garnishment, liens on your bank accounts, foreclosure on your home, or repossession of your car.
Bankruptcy Trustee’s Appointment
The bankruptcy court will appoint a trustee to manage your property and debts, since you’re essentially relinquishing control of these areas when you file Chapter 7. You cannot sell or give away any items to cover debts without the court’s consent, because the trustee is in charge.
Shortly after you initiate Chapter 7 proceedings, all of your creditors will receive a notice of this official meeting. You’ll be sworn in to answer questions asked by the trustee, so you must be completely honest in your responses. Still, the questions aren’t difficult, since they basically focus on the information you provided in your filing documents.
Chapter 7 Discharge
After the creditor’s meeting, the trustee will review all of your assets to determine if some can be sold to pay your debts. Note that only nonexempt property is subject to sale. You can protect exempt assets, such as your home, auto, Social Security benefits, some personal property, and others. Proceeds from what the trustee can sell are applied to your debts. Any amounts that are unsatisfied are discharged at the conclusion of the Chapter 7 bankruptcy process.