Bankruptcy
Chapter 7 Bankruptcy
Chapter 7 bankruptcy summary:
Chapter 7 bankruptcy erases your eligible debts, including credit cards, unsecured personal loans, and utility bills.
You may need to sell nonexempt assets. Nonexempt assets are things that the court requires you to surrender in exchange for bankruptcy protection, such as expensive cars, second homes, or recreational vehicles.
Chapter 7 bankruptcy can cause a lot of credit score damage and it stays on your credit report for up to 10 years.
Chapter 7 Bankruptcy Definition and Meaning
Chapter 7 bankruptcy allows your eligible debts to be wiped out by a bankruptcy court. Most unsecured debts, like credit cards and medical bills, are generally eligible for Chapter 7 discharge.
In exchange, you'll need to surrender any assets that aren't exempt under the law to the bankruptcy court. This usually includes things considered luxuries, such as vacation properties, recreational vehicles, and expensive cars. The court will sell these items and give the money to your creditors, to reduce your debt.
Chapter 7 Bankruptcy: A Comprehensive Breakdown
Chapter 7 bankruptcy begins by making sure you—and your debts—are eligible for Chapter 7 bankruptcy. You'll first need to pass a means test to see if you make too much money for Chapter 7. A means test is an analysis of your income and expenses. Do you have the means to make a payment? If so, you won’t be eligible for Chapter 7. You’ll file Chapter 13 instead, which is a payment plan.
You’re also required to take a credit counseling course within 180 days before filing.
Then, you'll file the bankruptcy petition with the court by filling out forms that detail your income, assets, debts, and liabilities. Filing fees up to $335 are due when you file, though individuals may request a payment plan.
After you file, the bankruptcy court will appoint a trustee. The trustee will check your documents and set a meeting with you to discuss your finances and the petition. Your creditors can also attend this meeting.
Before the bankruptcy is discharged, you must complete a debtor education course, usually within 60 days of the meeting with the trustee.
You can only file Chapter 7 bankruptcy once every eight years.
Key Characteristics of Chapter 7 Bankruptcy
Not all debts can be wiped out via Chapter 7 bankruptcy, but most unsecured debts are eligible. These include:
Credit card bills and fees
Collection agency accounts
Medical bills
Unsecured personal loans
Unpaid utility bills
Past-due rental or leasing fees
In some cases, auto accident claims, civil court judgments, taxes, and attorneys’ fees may be discharged through a Chapter 7 filing.
Credit scoring agencies count bankruptcies as negative events, so they can cause a lot of damage to your credit score. The amount of damage will depend on your existing credit history when you file. The better your credit is when you file, the more Chapter 7 could hurt. A Chapter 7 bankruptcy generally remains on your credit report for up to 10 years from the date you file.
On the bright side, the impact of negative events on your credit lessens over time. You could repair your credit score faster if you also work to rebuild your positive credit history as soon as you qualify for new credit.
Chapter 7 Bankruptcy FAQs
What is the difference between credit counseling, debt settlement, and bankruptcy?
Credit counseling is a form of debt relief that typically involves a debt management plan. The credit counseling agency works with your creditors to lower your interest rates and create a three to five year payoff plan. This could help you simplify debt repayment and get professional guidance on money management while you’re in the plan. When you use a debt management plan, credit counselors control when and how your payments get paid to your creditors.
Debt settlement means convincing your creditors to accept less than you owe as payment in full. Your creditors might be willing to settle your debts if you cannot afford to repay the full amount. With a professional debt settlement program like Freedom Debt Relief, you approve all settlements and have more control over your money compared to credit counseling. For example, although expert negotiators will guide and advise you, Freedom Debt Relief does not decide when or how your money gets paid to creditors. All these final decisions must be approved by you, the consumer.
Bankruptcy is a court-ordered plan that lets you get some but possibly not all debts discharged, but you might have to give up some of the things you own or agree to an aggressive repayment plan. If you want to avoid bankruptcy, credit counseling or debt settlement programs could be better options.
Are there credit card debts that you can’t erase during Chapter 7 bankruptcy?
There are several cases in which you won’t be able to discharge all of your credit card debt through bankruptcy:
You used your credit card to pay a non-dischargeable cost like alimony, back taxes, or student loans.
You purchased luxury goods or services within 90 days of filing.
You misled your credit card company on your application—for instance, by overstating your income.
You purchased jewelry, furniture, an appliance, computers, electronics, or a mattress and the terms of purchase (on your receipt) require you to return the property to discharge the debt.
What’s worse for credit scores, debt settlement or bankruptcy?
Expect either solution to drop your score by 100 to 200 points. The exact drop depends on what your credit score is before attempting a debt settlement or bankruptcy. For many consumers, the missed payments, collections and other serious delinquencies leading up to a bankruptcy filing or a debt settlement do much of the damage. Your ability to bounce back depends on how you manage your payments and use credit in the future, and that should be easier once your life becomes more affordable.
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