Unchecked and unpaid debt can lead to all sorts of stress and problems. If you get behind on your payments, it can put you in a hole that you can’t get out of, at which point you may consider filing for bankruptcy. Chapter 7 bankruptcy is a process that can help you erase your debt.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is the most common type of bankruptcy (with the other option being Chapter 13). With chapter 7, the goal is to get a fresh, financial start by getting rid of your debt. Most people who file Chapter 7 have significant amounts of unsecured debt and significant secured debts as well.
Once you file chapter 7 bankruptcy, the process takes up to six months, and several things will happen within that time period. Within 40 days of your filing, a meeting of creditors, which is also known as a 341 hearing, will take place. This meeting allows the debtor to meet with their trustee, as well as any creditors who wish to attend, to discuss and verify the facts of the case. Even though they are invited, your creditors will rarely choose to attend.
After this meeting, there will be a 60 day period where the creditors can object if they believe that some of your debts should not be discharged. If they do not file in bankruptcy court within 60 days, whatever debts the court decided will be discharged.
Who Qualifies for Chapter 7?
To determine who is eligible to file for chapter 7 bankruptcy, the bankruptcy courts have developed a means test. Here is the simplest explanation we can give, but if you are considering filing chapter 7, you should schedule a free consultation. Each case is different, which means that you need a bankruptcy attorney to review it with you.
With the means test, the first step is to measure your average monthly income over the previous six months before your case is filed. If your income falls below the median income for a household of your size within your state, then you are eligible for chapter 7. Here are the median incomes for different household sizes in the state of Georgia.
- Single person household: $46,810
- Two-person household: $61,794
- Three-person household: $70,863
- Four-person household $80,510
So, if your income is less than the number that represents your household size, you pass the test and qualify for chapter 7. If your income is higher than the state median, don’t worry; you are not automatically disqualified. However, you will need to perform additional calculations to demonstrate that you still qualify under bankruptcy law.
If your income doesn’t qualify you, the next step is to test your disposable income. To calculate your disposable income, you will add up all of your household expenses and subtract this number from your actual income. The remainder is your disposable income.
In other words: current monthly income – monthly expenses = monthly disposable income.
You can include the vast majority of your household expenses to determine what you pay. You can include any of the following:
- Housing expenses, such as your rent or your mortgage payment
- Utility expenses
- Food
- Clothing
- Taxes
- Involuntary payroll deductions, such as union dues
- Transportation costs, including your monthly car payment, automobile insurance, and money spent on gas
- Court-ordered payments, such as spousal support or child payment
- Child care expenses
- Healthcare expenses, such as insurance or doctor’s bills
Some of these categories, such as clothing, utility expenses, and food, should be calculated with national or local standards in mind, as there are limits to how much you can qualify for in each category. For instance, The 2018 IRS national standards for allowable living expenses permit a single person $89 for shoes, clothing, and clothing-related services, such as laundry and dry cleaning. For utilities and housing expenses, you will use local county standards.
For other categories, you will input what your actual expenses are, regardless of what the national or local median is. For instance, you input the bills like your mortgage, car payment, or child support without regard of what other people may be paying for those same things.
It is important that you are extremely thorough in calculating your expenses and use your receipts to guide you. If you overestimate and an auditor decides to check your story, you could be in big trouble. If you underestimate, the bankruptcy court may use those numbers to conclude that you don’t qualify, when you actually do.
In addition to these stipulations, there are some other important regulations about who can file. Anyone who meets any of the following criteria does not qualify for chapter 7:
- Anyone who has filed a bankruptcy case that was dismissed within the previous 180 days
- Anyone who has successfully filed chapter 13 within the previous 6 years or chapter 7 within the previous 8
What Types of Debt Can I Liquidate?
When you file chapter 7 bankruptcy, you most likely will not be able to erase every debt you have. Chapter 7 is designed specifically to help free you from unsecured debts, which are those that do not have an asset. This means that when you do not pay back your loans, there is nothing that the creditor can repossess.
Here are some of the most common types of debt that Chapter 7 bankruptcy can help you liquidate:
- Credit card debts
- Medical bills
- Personal loans
However, there are some unsecured debts that you simply will not be able to erase. Debts such as student loans, child support, post-petition HOA fees, post-petition timeshare fees, and tax debts less than 3 years old are non-dischargeable.
Of course, secured debts, such as mortgages and car payments, can be included in chapter 7. However, if you choose to include these secured debts, you will also be forced to surrender them to your creditors.
If you are making payments on time, you may be able to obtain a reaffirmation agreement from your lender and the court, which means that you maintain the asset and continue paying the debt. By signing a reaffirmation agreement, you agree to give up your chapter 7 bankruptcy rights to wipe out the debt and legally treat it as if you never filed bankruptcy.
What Are Some of the Advantages and Disadvantages of Chapter 7?
Under the right conditions, bankruptcy is not as destructive as most people believe it to be. In fact, there actually are a few advantages for debtors filing under the right conditions.
- Automatic stay: Whether it be under chapter 7 or chapter 13 bankruptcy, automatic stay is one of the most significant benefits. Essentially, this law protects debtors from collection agencies and creditors seeking them out and urging them to repay their debts. Once bankruptcy is filed, almost all collection agencies are forbidden from making contact. This also prevents them from attempting to repossess your home or car.
- Fresh start: If there is simply no way that you will be able to repay your debts, particularly those that are unsecured, chapter 7 can ease your burden and help you start anew. While there will still be consequences, not having to pay the debts is a key benefit.
However, there are significant downsides as well:
- Credit score: Your bankruptcy will not ruin your financial record forever, but it will remain on file for up to ten years. This will prevent you from getting loans with favorable interest rates during that time period.
- Lose possessions: If you are not able to reaffirm or get exemptions in bankruptcy court, you may lose your property, home, or cars. More likely, you will lose any luxury items you own, which include things like boats and second houses.
If you are considering filing chapter 7 bankruptcy, our team of bankruptcy attorneys is ready to assist you. Every bankruptcy case is different, so it is important that we meet so we can better understand your circumstances. Contact the Law Offices of Jeffrey B. Kelly today to discuss your needs. Call us at 770-637-1756 to schedule a consultation.