Chapter 7? Chapter 11? Chapter 13? What are all these “chapters” and which one would be best for me? Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” is a legal process designed to help individuals who are overwhelmed by debt. It is in the truest sense of the words, a “fresh start.” Here’s a straightforward guide to understanding how it works.
the means test
The first step in determining if you are eligible for a Chapter 7 discharge is the means test. The means test takes your income for the six months prior to filing bankruptcy and compares it to the medium household income for the state. So, if your single with no children and earn less than $52,996.00 a year, you “pass” the means test. Or as it’s characterized in bankruptcy, there is no presumption of abuse. If your income is above it, you may have to file Chapter 13 bankruptcy.
However, if your income is slightly above the medium income, or is above it because of a one-time situation (say an unusually high bonus) you can challenge the presumption of abuse. I recently had a client that had this exact situation and after explaining and documenting the unusually high income, the bankruptcy trustee endorsed the Chapter 7 discharge.
PRE-BANKRUPTCY CREDIT COUNSELING
Prior to filing bankruptcy, a consumer is required to have completed a credit counseling course. This is not as bad as it sounds. This course usually lasts around two hours and can be done online. Then, after you file your bankruptcy but prior to the final discharge of your debt, you’ll have to take a second online pre-discharge debtor education course. It lasts about the same time as the credit counseling course.
THE MEETING OF CREDITORS
About one month after filing your chapter 7 bankruptcy, the meeting of creditors will take place. This is also known as a 341 meeting. What is this? This is a set time where you will appear on zoom with me and the bankruptcy trustee to potentially answer questions from your creditors. Most of the time it’s an empty room and you will not have to deal with creditors. Because Chapter 7 bankruptcy is pretty cut and dry, there is usually no reason for a creditor to show up. Then you answer about five questions from the trustee, and you are on your way. This generally takes no more than five minutes.
Discharge of Debts
After the liquidation process, the court will discharge most of your remaining debts. This means you are no longer legally obligated to pay them. Common debts that can be discharged include credit card debt, medical bills, and personal loans. However, some debts, like student loans, child support, and certain taxes, cannot be discharged.
Pros of Chapter 7 Bankruptcy
- Fresh Start: Chapter 7 bankruptcy can eliminate most of your debts, giving you a clean slate.
- Quick Process: The entire process typically takes about 3 to 6 months.
- Protection: The automatic stay stops creditors from harassing you during the process.
The thoughts, opinions and musings of this blog are those of Peter Schneider, a consumer advocate attorney at Northwest Debt Resolution, LLC. They are just that, his thoughts, opinions and musings and should be treated as such. They are not legal advice. If you have more questions or would just like to discuss your potential case, please contact me for a consultation.
