Bankruptcy Basics: Understanding Chapter 7 Bankruptcy

Chapter 7 is the most common form of bankruptcy in the US. In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property and all of his or her unsecured debt is usually discharged. What property is exempt varies from state to state. Non-exempt property is theoretically sold to pay creditors. In practice, there usually isn’t any significant property to be liquidated. For debtors with significant assets—for instance, equity in a house—filing for a Chapter 13 bankruptcy may be preferable.

Not everyone qualifies to file for a Chapter 7 bankruptcy. If it is determined that the debtor has the means repay the debt, he or she will likely need to file for a Chapter 13 bankruptcy instead. Ability to repay is partially determined based on whether or not the debtor’s income is above the median income in the state where the debtor lives; having an income above the median income is usually interpreted to mean that the debtor can make payments.

Though a Chapter 7 bankruptcy means that unsecured debt, such as credit card debt, is discharged, some types of debt cannot be discharged. These include child support, income taxes, many student loans, and property taxes.

It’s debatable whether Chapter 7 or Chapter 13 bankruptcy has a more negative effect on credit. A Chapter 7 bankruptcy stays on a credit report for 10 years, in contrast to a Chapter 13 bankruptcy, which stays on a credit report for seven years. Either bankruptcy is going to have a negative effect on credit, but it’s possible to start rebuilding credit immediately. Filing for bankruptcy puts an automatic stay in effect, meaning that creditors need to stop trying to collect the debt. Creditors can’t garnish wages or empty bank accounts while the automatic stay is in effect. Bankruptcy can provide a real possibility for a fresh start.

If you’d like to learn more about the bankruptcy process, we can help. If you are in financial distress and would like to discuss your situation to determine whether bankruptcy may be the best option for you and your family, contact us today. Our team is standing by to assist!