Are you drowning in debt? Being financially overwhelmed is no fun. In fact, according to a recent CreditWise study, 73% of Americans report finances as their number one cause of stress. But is declaring bankruptcy a way out? The short answer is, maybe. There are two types of individual bankruptcies that individuals may consider: Chapter 7 and chapter 13. Chapter 7 bankruptcy is generally quicker but requires selling almost all one’s assets to pay creditors. Chapter 13 functions more as a debt restructuring that you pay off over several years. In either case, the decision should only be a last resort. And that’s if you even qualify!
What Happens in Chapter 7 Bankruptcy?
Also known as “liquidation” or “straight” bankruptcy, filing for chapter 7 will wipe out most of your debts. However, it requires selling off your assets — meaning most of your stuff — to make partial payments to creditors. There are some items that are exempt, such as clothing, books, furnishings, and tools of your trade. And you might be able to save your car if you can get an exemption and are still making payments. However, if you want to keep your house and family heirlooms, this is probably not the route to take.
After you sell your nonexempt assets and pay your creditors, the bankruptcy court will “cancel” your remaining debts. However, keep in mind that some debts are never considered “dischargeable,” such as:
- Student loans
- Child or spousal support
- Back taxes or fines you owe to the government
Also, it won’t erase any cash advances or luxury items purchased 60-90 days before filing.
Who Might Consider Filing for Chapter 7 Bankruptcy?
If you find yourself struggling with the following, it might be worth exploring chapter 7 bankruptcy:
- You’re sinking in medical or credit card debt but can’t pay your minimums.
- Debt collectors harass you because you’re so delinquent.
- Your income is insufficient to pay your monthly expenses.
- You must borrow money to pay your overdue bills.
- You’re accumulating exorbitant late fees and interest.
- You must choose which bills to pay each month.
- Your credit score is low.
- You feel like you’ve exhausted all other options.
Situations that put people in such predicaments might include job loss, a catastrophic medical event/illness, or even divorce. But remember, even with all of the above, you won’t automatically qualify for chapter 7 bankruptcy.
How Does a Person Qualify for Chapter 7 Bankruptcy?
To file for chapter 7 bankruptcy, all candidates must meet a certain set of criteria:
1. You must pass a “means test.”
Before filing for chapter 7 bankruptcy, you must show that your average monthly income in the previous six months is lower than the median income for a same-size household in your state. If it’s not, then you must pass what’s known as a “means test.” This test determines if you have enough disposable income to make partial payments to creditors or not.
Determining if you pass the “means test” can be complex and varies by state. That’s why it’s a good idea to meet with a lawyer before you file. The means test is in place to prevent people from being “presumptively abusive.” A judge will throw out your case if it seems you’re attempting to defraud creditors. In other words, you must prove you’re in dire straits, not just filing to get out of paying your debts.
2. You have to attend credit counseling.
Next, you must “graduate” from an individual or group credit counseling course within 180 days of filing for chapter 7 bankruptcy. Credit counseling organizations are usually non-profit, and their counselors are trained in areas of consumer credit, budgeting, and money/debt management. If you need help finding an organization in your area, the United States Department of Justice publishes a list of approved credit counseling agencies. This credit counseling requirement is in place to hopefully help you avoid declaring bankruptcy at all!
3. You don’t have a recent history of filing for bankruptcy.
To open a new bankruptcy claim, you cannot have filed for chapter 7 bankruptcy in the previous eight years or chapter 13 bankruptcy in the previous six years. Plus, you must wait 181 days before refiling if a judge dismissed your earlier attempts.
This is yet another reason to meet with a lawyer before filing! If you’re financially stressed, you don’t want to have to wait six months to try again because your case was thrown out for some reason! Get help and get it right the first time!
How Do I Know if Filing for Chapter 7 Bankruptcy Is the Right Move for Me?
Filing for chapter 7 bankruptcy will seriously affect your future credit, so it’s not a decision to take lightly. A chapter 7 bankruptcy remains on your credit record for 10 years. Thankfully, its effect on your score will diminish over time.
The main components to keep in mind with chapter 7 bankruptcy versus other types are:
- It requires you pass a “means test” before filing.
- You must liquidate property to pay off creditors (so it’s probably not the best option if you have a lot of valuable assets).
- If successful, your creditors will forgive your dischargeable debt without a repayment plan.
The bottom line is that chapter 7 bankruptcy is supported by the U.S. government to give honest individual debtors a “fresh start.” So, if you really need a reset and meet the criteria, filing for bankruptcy could positively revive your financial life.
Ready to see if you may qualify? Complete your free online bankruptcy case evaluation now!
Kimberly Dawn Neumann
Kimberly Dawn Neumann is a multi-published NYC-based magazine and book writer whose work has appeared in a wide variety of publications ranging from Forbes to Cosmopolitan. She graduated summa cum laude from the University of Maryland, College of Journalism. For more, visit: www.KDNeumann.com, Instagram @dancerscribe, and Twitter @KimberlyNeumann