Most people face some financial troubles at some point in their lives, and manage to dig their way out eventually. But, then there are times when the debt is overwhelming, and paying it off seems virtually impossible. In these circumstances, more drastic measures must be taken. One such option is chapter 7 bankruptcy, which is not a route to be taken lightly.
Here are some frequently asked questions to give you an idea of what is involved here.
Chapter 7 bankruptcy is a legal proceeding that allows you to discharge most of your debts though the Federal Bankruptcy Court. It is designed to give you a fresh financial start. Once discharged by the court, you are no longer responsible for these debts, and creditors can no longer collect on them. The filing will stay on your credit report for 10 years.
Who is Eligible for Chapter 7 Bankruptcy?
To file chapter 7 bankruptcy, there are certain financial requirements that must be met. The first step is comparing your income against the median income for your family size in your particular state. If yours is less, you qualify, simple as that.
If your income is more than this median, you must then do a bit more number crunching to determine whether you have disposable income deemed sufficient to pay down some of your debt. Basically, you will take your income, deduct all expenses allowed under the means test, and the amount left over will determine whether you are eligible. You can use this bankruptcy test calculator to help determine your eligibility.
If your disposable income is too high to qualify for chapter 7, you can investigate chapter 13, which involves paying off your debts on a payment plan lasting three to five years. After this time, any remaining eligible debts are discharged, and you are no longer responsible for them.
Do I Need an Attorney to File?
The short answer is no, you are not required to have legal representation for filing bankruptcy. But while it may be tempting to file on your own—referred to as ‘pro se’ in legal terms—to save the cost of attorney’s fees, even if your case is relatively straightforward, it is usually a good idea to work with a bankruptcy attorney. He or she will have a thorough understanding of the documents required, property exemption rules and other aspects of the proceedings.
If your case is a bit more complicated due to factors such as significant assets, income above the median, or fraud claims by any of your creditors, it is essential you seek professional legal help.
What Debts are Eligible and Ineligible for Discharge?
Debts eligible for discharge include credit cards, accounts in collection, medical bills, personal loans, utility bills, auto accident judgments (except ones involving drunk driving), business debt, money owed through lease agreements, non-fraud based civil judgments, taxes and tax penalties older than a certain amount of time and attorney fees (except for custody and alimony cases).
Debts not eligible for discharge include student loans (except in very rare cases), criminal fines, civil fines involving fraud, drunk driving auto accident damages, debts for luxury goods to a single creditor, alimony, child support, debts not listed on the filing (though if you have no assets, they are usually discharged), certain tax debts, debts to some tax-advantaged retirement plans, fines and penalties owed to government agencies and fees for homeowners associations and related organizations.
What Happens to My House and Other Property?
When it comes to your property, there is some that falls under ‘exempt property’ meaning you are not required to liquidate it to pay down some of your debt before receiving a discharge. A certain amount of equity in the home is considered ‘exempt’ meaning the house cant’ be sold—the amount of ‘exempt’ equity varies by state. In most cases, you are also allowed to keep your car. As for other personal effects—clothing, furnishings, etc..– so long as they are reasonably necessary, they should be safe. The list of exemptions is quite extensive, and most people do not have to give up much of their property.