The term “bankruptcy” often gets a bad rap, but it is simply a legal tool that helps those in debt gain a fresh start. For those who are juggling bills, dodging collectors, and feel like they are drowning in debt they can’t pay, filing for bankruptcy can provide a way out.
There are two types of personal bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 is often quicker because it eliminates many debts altogether by selling off non-exempt assets. Chapter 13, on the other hand, involves a court-appointed repayment plan that can take 3-5 years.
Here’s a brief overview of the Chapter 7 process and what to expect.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most common type for individuals seeking debt relief. With Chapter 7, the court will appoint a trustee who can sell any non-exempt assets to pay off creditors. Don’t let this frighten you away, though. Many individuals who file for Chapter 7 keep most, if not all, of their property because it is covered through exemptions.
Let’s walk through the filing process:
1. The Means Test
The first step in filing for Chapter 7 bankruptcy is passing a “means test.” This test reviews all of your income to determine how it compares to your state’s median income. Only those who make less money than the state’s median income qualify for Chapter 7. If you are deemed to make higher than the median, the courts will direct you to instead apply for Chapter 13.
2. Credit Counseling
After the “means test” but before you can officially file for bankruptcy, the court will require you to complete a credit counseling course. The purpose of this course is to allow you to review other alternatives to bankruptcy and determine if bankruptcy is truly the best option. It also covers what happens after bankruptcy and it’s consequences. This course must be completed within 180 days prior to filing.
3. Filing
The third step is to actually file your petition for Chapter 7 bankruptcy with the court. This will include listing all of your debts such as credit cards, loans, and medical bills. You will also have to provide an inventory of all assets and property, recent tax returns, income statements, living expenses, and creditor information. Once filing is complete, the court will grant you an “automatic stay,” which means that creditors can no longer pursue you for payments.
4. Trustee Appointment
The court will then appoint you a bankruptcy trustee. This individual will determine if you have any non-exempt assets that can be sold to pay off creditors. The next step is to attend a 341 meeting of creditors where the trustee will ask you financial questions under oath. While creditors are allowed to attend this meeting, it is rare that they do.
5. Debtor Education Course
Prior to the court discharging your debts, you will have to complete a debtor education course. This course will teach you how to manage your finances more responsibly in the future and covers topics like budgeting, building savings, and using credit wisely.
6. Discharge of Debts
The discharge order comes from the court typically three to six months after filing has started. If there are no objections, this order will eliminate most of your unsecured debts. Such debt includes credit card bills, medical bills, and personal loans. However, it is important to keep in mind that not all debts will be discharged, such as student loans, child support, alimony, and some taxes.
What to Expect After Debt Discharge
While filing for bankruptcy does provide individuals with a fresh start on their finances and stops creditors from collecting, it also has some consequences. For starters, Chapter 7 bankruptcy will stay on your credit report for 10 years. However, it’s impact does lessen over time if you are able to pay debts more responsibly. Also, as Chapter 7 does not discharge all debts, you will still have to make payments on student loans, child support, and alimony.
Next Steps
As much as it may seem like hitting rock bottom, filing for Chapter 7 bankruptcy is not the end. It’s instead a way to start over and regain control of your finances. While bankruptcy should be a last resort, it can also be a lifeline that many people need.
Find Your Financial Reset with Hines Law Offices
Remember, you don’t have to do it alone. Many people file for bankruptcy and Hines Law Offices is here to help with planning, guidance, and legal counsel from start to finish.
We serve clients in throughout Boston and surrounding areas. If you’re considering Chapter 7 or Chapter 13, call today to speak with an experienced bankruptcy lawyer and schedule a Free Consultation.