Chapter 7: Eliminate Debt
What is Chapter 7 Bankruptcy?
These days, we’re all feeling the weight of the recession.
Forget using our credit cards to splurge on a pair of shoes or a fun night out—most of us are relying on our credit cards just so we can make it from paycheck-to-paycheck.
As our debt grows, so too does our stress.
And it’s so easy to fall behind on payments. Even if you just miss one payment, late charges and interest rates can easily spiral out of control.
So, what are we to do when we find we’re in over our heads?
Some people are seeking the protection of Chapter 7 bankruptcy as a way to get out of debt and get back on track.
In fact, last year alone more than one million people filed bankruptcy and many of those filings were Chapter 7 filings.
Chapter 7 Bankruptcy Was Designed to Eliminate Debt
Chapter 7 bankruptcy works by discharging (eliminating) a debtor’s unsecured debts.
Unsecured debts are debts that aren’t tied to property, and may include:
- utility bills
- credit card debt
- parking tickets
- payday loans
- medical bills and more
Once those debts are discharged, the filer is no longer responsible for them. That means that he or she never has to repay them.
Chapter 7 and the Automatic Stay
Immediately after a person files Chapter 7, they are typically given the protection of the bankruptcy automatic stay, which is a legal order that prohibits creditors from pursuing any further collection efforts.
In most cases, the bankruptcy automatic stay can STOP:
- Utility Shutoff
- Many Lawsuits
- Some Wage Garnishments
But it’s important to keep in mind that under Chapter 7, the bankruptcy court has the right to sell a debtor’s significant property in order to repay his or her creditors.
For this reason, Chapter 7 is usually reserved for people who have little or no property and rent their home or have little equity in their home. (Chapter 13 is usually used by people who have property they want to protect.)
In order to file Chapter 7 bankruptcy, a debtor must qualify by passing the means test.
The Chapter 7 Means Test
The 2005 bankruptcy law requires that debtors pass a means test in order to file Chapter 7.
The purpose of this test is to make sure Chapter 7 bankruptcy is the last option for the debtor and to see if they have enough money to repay their debts under a Chapter 13 bankruptcy repayment plan.
The means test analyzes a person’s income and compares it to the median income in their state. If their income is at or below the state median income level, they are typically allowed to file Chapter 7.
If not, the court then looks at another factor: the amount of a person’s disposable income (determined by IRS allowable expenses).
If their amount of disposable income is under $6,000 over the next five years, they are typically allowed to file Chapter 7 bankruptcy.
If not, they may be submitted to further income analysis or they may decide to file under Chapter 13.
If you’re considering filing Chapter 7 bankruptcy, a bankruptcy lawyer can help you determine whether you qualify.