what happens when you file chapter 7

The word bankruptcy is scary for many. Sometimes, we often associate bankruptcy as a desperate, last resort. However, the reality is that declaring bankruptcy is far more common than we think; even more interesting are the top reasons people declare bankruptcy. There are different types of bankruptcy but In this article we’ll dive into what happens when you file chapter 7 specifically.

 

Before reading any further, please note that filing for bankruptcy is a serious process. It is recommended that you consult a bankruptcy lawyer before proceeding. The information below serves only for general education and may not be relevant to all situations.

What is bankruptcy and what causes it?

Bankruptcy is defined as a legal process resulting from a person being unable to repay debts in often a substantial amount. While filing for non-business bankruptcy has been on the decline since 2010, in 2019 alone over 750,000 Americans filed for bankruptcy.(1) According to a 2019 study featured in the American Journal of Public Health, some of the top reasons for filing bankruptcy include medical expenses and loss of income.(2)

Sometimes rare or serious diseases may result in high medical bills often not covered entirely by health insurance. These bills can lead to a person having to wipe our his or her savings, retirement funds, and emergency accounts.

Loss of income is also a significant contributor to bankruptcy filings. A survey from Bankrate found that the average cost of an emergency in the US was about $3,500 with 28% of respondents indicating they have experienced an emergency in the past year. Without steady income, many Americans will be unable to fund these emergencies, resorting to taking out loans or using credit cards.

 

Are all bankruptcy claims the same?

The short answer is no. There are actually multiple types of bankruptcies one can file.

Chapter 7, known as the “liquidation bankruptcy”, is one of the more common types. This form of bankruptcy requires that certain assets are sold to pay unsecured creditors. Certain assets are protected by exemptions depending on state law (eg: retirement funds or a home). You can only file for chapter 7 if the court decides you don’t make enough money to pay your debt. Chapter 7 will NOT clear certain debts such as student loans, child support, or government debts (taxes and fines)-you are still required to pay these even after declaring bankruptcy. (3)

Note that chapter 7 bankruptcy will negatively affect your credit score. Chapter 7 will stay on your credit report for 10 years and will negatively impact your credit score up to 200 points. (4)

 

How Do You File For Bankruptcy?

Filing for chapter 7 begins with the debtor filing a petition with the local bankruptcy court (where the debtor lives or has principal assets). When filing, the debtor must also provide the court with the following:

  • A schedule of assets and liabilities
  • Current income and expenditures
  • Statement of financial affairs
  • Schedule of contracts and unexpired leases
  • Most recent tax returns

There are additional documents required for those submitting consumer debts including a certificate of credit counseling, copy of debt repayment plan, evidence of payment from employer, and a record of any interest via federal or state qualified education or tuition accounts.

Please note if filing as husband and wife, the couple is held to the same standard of filing as an individual debtor.

The debtor may at this point file for a schedule of “exempt” property. In this case, the debtor may want to protect certain assets (eg. a home). However, this only relates to property allowed under federal or state law.

Between 21 and 40 days after petitioning, a meeting takes place in which the debtor is asked a variety of questions by the creditors. This meeting is used in part to determine whether the filing is presumed to fall under “abuse” in which case the debtor does not qualify for chapter 7, and to ensure that the debtor fully understands the consequences of filing for chapter 7.

Once filing is complete and the case is approved, a US Trustee appointed by the court will work to liquidate the non-exempt assets.  

 

are there any fees?

Yes, there are feels when filing chapter 7 in the form of a case filing fee, misc admin fee, and a trustee surcharge. These fees may be paid in installments but final payment must be made no later than 120 days after filing the petition.     

For more information, please consult a bankruptcy lawyer, or visit uscourts.gov.

Sources:

(1) Annual number of non business bankruptcy cases filed in the United States frm 2000 to 2019. https://www.statista.com/statistics/817911/number-of-non-business-bankruptcies-in-the-united-states/#:~:text=This%20statistic%20shows%20the%20number,nationwide%20in%20the%20United%20States.

(2) Medical Bankruptcy: Still Common Despite the Affordable Care Act. http://www.pnhp.org/docs/AJPHBankruptcy2019.pdf

(3) Chapter 7 Bankruptcy FAQ. Cara O’Neill JD. hrome-error://chromewebdata

(4) Filing Bankruptcy: Chapter 7 vs. Chapter 11 vs. Chapter 13. Gerri Detweiller. July 13, 2020. https://www.credit.com/debt/filing-for-bankruptcy-difference-between-chapters-7-11-13/