Table of Contents
- What is Chapter 7 Bankruptcy?
- Eligibility
- The Process of Filing
- The Impact of Chapter 7
- Benefits of Chapter 7 Bankruptcy
- Potential Drawbacks
- Alternatives
- FAQs
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is a legal proceeding where the Debtor applies to have his or her debt eliminated. Visit US Courts for Chapter 7 Basics
Chapter 7 Bankruptcy, is often referred to as ‘liquidation bankruptcy”, which is somewhat misleading, and creates unfounded fears that filing bankruptcy means losing assets. In truth, the vast majority of Chapter 7 bankruptcies do not involve liquidation of the debtor’s assets. To ensure your assets are not liquidated in bankruptcy, it is important to consult with an experienced attorney to help you understand the Nevada property exemptions.
Every Chapter 7 bankruptcy consultation includes in-depth discussion and analysis of your assets, and how they will be treated in bankruptcy.
A Chapter 7 bankruptcy is also sometimes called a “total bankruptcy”, because it eliminates debt, as opposed to setting the debtor up on a repayment plan. The debts are discharged in totality. However, only certain types of debts can be included in the discharge. Typically, debts that can be discharged include medical bills, credit cards, unsecured loans, payday loans, signature loans, personal loans, revolving credit accounts, lawsuits, and judgments. Each person’s situation is unique, and in certain circumstances, chapter 7 can discharge tax liability, and secured debts like automobile financing loans, mortgages, and student loans.
Eligibility
To qualify for Chapter 7, individuals must pass the ‘means test,’ which is a mathematical formula used to assess the debtor’s financial resources. This test considers your income, expenses, and the size of your family, and to a lesser extent, the amount and types of debt to determine if you have enough disposable income to repay your debts. This formula is not necessarily a realistic assessment of what you can afford given your current budget, and the results can be counterintuitive.
Therefore, you must consult with a competent bankruptcy attorney who understands how to best present your facts to the court.
Eligibility Criteria
| Eligibility Criteria | Requirements |
|---|---|
| Regular Income | Debtors can be unemployed, retired, receive government assistance, be employed, self-employed, or own businesses. There is no requirement regarding income to be eligible for Chapter 7, other than your income not greatly exceeding your regular living expenses. |
| Means Test | Required if you earn more than the median income |
| t Limits | No Limits is no maximum or minimum debt limit |
| Previous Bankruptcy | Must Wait 8 Years from Previous Chapter 7 Discharge. (But if your prior Chapter 7 discharge was less than 8 years and you need to file bankruptcy, you may consider filing Chapter 13). |
You might be a good candidate for Chapter 7 if:
- You are current on your house or car loan or do not have either, or you are willing to surrender the collateral to discharge the loan.
- Most of your debt is unsecured.
- You do not have disposable income sufficient to repay your unsecured debts.
- You are being sued.
- Your wages are being garnished.
- You have bad credit
The Process of Filing
After a thorough consultation, you will be given a list of financial documents like pay stubs, bank statements, tax returns, etc, to submit for our review. With that information, we will prepare your bankruptcy petition for filing with the court. Upon filing the petition with the court, you receive the protection of the Automatic Stay, which prevents creditors from contacting you or taking any action regarding the debts.
The case lasts 3-4 months, and you will be required to make an appearance in the case, called your “Creditor’s Meeting”. The meeting is conducted by a bankruptcy trustee, who verifies your identity and that the information you provided in the bankruptcy petition (assets, income, expenses, debts, etc) is accurate.
The Impact of Chapter 7
Chapter 7 provides instant relief from overwhelming debt, and the ability to commence rebuilding their credit. For many clients who are considering filing Chapter 7, bad credit, low credit scores, and derogatory credit marks have haunted them for years leading up to the bankruptcy filing.
The impact of filing Chapter 7 for these debtors, is that their credit score increases, and their creditworthiness improves.
Although it is accurate to say filing bankruptcy can significantly affect your credit score and does remain on your credit report for up to 10 years, it is important to distinguish between debtors who are filing bankruptcy with poor credit and those with good credit.
In our experience, only those individuals who have great credit before filing bankruptcy have anything to lose by filing bankruptcy. The majority of my clients file bankruptcy and almost immediately qualify for low-limit credit cards and car loans. Furthermore, with responsible financial habits, many people can start to rebuild their credit soon after their bankruptcy is discharged to go on to have better credit than they had before bankruptcy.
There is a cost to carrying debt, and bad credit. When you have low credit scores, you do not have access to financing and loans when needed, and you have to pay more (high-interest rate) (think: car loan at 5% interest vs. 25%) The monthly payment car loan of $25,000 is $475/mo. at 7% ARP or $600/mo at 17% APR.
Benefits of Chapter 7 Bankruptcy
In addition to protecting and improving one’s creditworthiness, Chapter 7 Bankruptcy can offer several benefits for those struggling with debt. The most significant advantage is the discharge of most unsecured debts, which frees up the Debtor’s limited financial resources to use for necessary living expenses, and for rebuilding a solid financial base.
Additionally, the automatic stay that comes into effect upon filing can provide immediate relief from creditor harassment, wage garnishments, and lawsuits.
Potential Drawbacks
Chapter 7 Bankruptcy can provide significant relief, but it’s not without potential drawbacks. The most notable is the potential impact on your credit score, which can make it more challenging to obtain credit in the future.
Additionally, if you hire an attorney, you will be paying for legal services. However, in most cases, the cost of hiring an attorney is an insignificant amount, especially when compared to the total amount of debt you can discharge. Often, it is even less than just a couple of months of credit card payments, making the choice not to file a potentially costly mistake. The upfront cost of hiring an attorney can be daunting, but legal fees can often be paid in installments, and result in an overall reduction in your debt and monthly debt payments.
Alternatives
If Chapter 7 Bankruptcy isn’t the right fit for your financial situation, there are alternatives to consider. These may include debt consolidation, debt settlement, litigation, or filing for a different type of bankruptcy, such as Chapter 13.
FAQs
What debts can be discharged in Chapter 7 Bankruptcy?
Most unsecured debts, like credit card debt, medical bills, and personal loans, can be discharged. Although, certain debts like student loans, child support, and tax debts are typically not dischargeable. However, there are many exceptions to these general rules.
As a practicing attorney for more than two decades in multiple states, I have encountered almost every situation and can advise you of how your debts would be treated in bankruptcy.
How long does Chapter 7 take?
From filing to discharge, the process usually takes 3-4 months. As soon as the case is filed, however, collection efforts stop as a result of the “”Automatic Stay”, and payments to dischargeable debts typically are suspended as the case moves through the process.
Can I keep my property?
Yes! Nevada law provides generous exemptions for debtor’s property, including real estate (usually a homestead), automobiles, retirement savings, home furnishings, clothes, jewelry, and financial assets.
Debtors filing Chapter 7 seldom possess property that can be liquidated in bankruptcy. This is often due to comprehensive consultations with knowledgeable attorneys, who can provide valuable advice about what to anticipate before your case is officially filed.
How often can I file for Chapter 7?
You can file for Chapter 7 Bankruptcy once every eight years.
Ready To Begin Your Debt Relief Journey?
We understand how stressful filing for bankruptcy can be. We strive to make the process as easy as possible. Contact us today to discuss your options and see what the best path forward is for you.