Commonly known as straight bankruptcy or liquidation bankruptcy, Chapter 7 bankruptcy is the most common type filed in the states. It can be incredibly beneficial to seriously struggling companies by liquidating assets to relieve debt while allowing you to keep enough properties that allow you to live and start anew.
How Chapter 7 Bankruptcy Works
A couple of things happen once your Chapter 7 bankruptcy filing is approved. First, the court places a temporary hold on all current debt collections. This prevents creditors from collecting payments, wages cannot be garnished, and property cannot be repossessed (including evictions or foreclosures).
Second, a court-appointed trustee is assigned to your case. This person assesses the value of your assets and sells them off. Then, all of the money from those assets are distributed to creditors and debt collectors.
There are rarely enough liquidation funds to pay off all of your debts, so the rest is discharged, zeroing out your balance. However, some creditors can prevent certain debts from becoming discharged. This can include cash advances or frivolous purchases on a credit card, in which the court decides you must repay.
Certain amounts cannot be discharged in Chapter 7 bankruptcy filings. This includes alimony, court fees, child support, student loans, and tax debts. You’ll have to pay these from your disposable income, even after the liquidation of your assets.
Property Exempt from Chapter 7 Bankruptcy
One of the major benefits of filing for Chapter 7 bankruptcy is the exempt property which allows you to continue living and start anew. These are assets that cannot be liquidated, securing your safety and future.
A list of exempt properties is available from the federal government as well as from many states, who have created their own list. The use of the federal list is required in some areas, while others require the state list. Some states even provide the option to choose between state and federal. Your trustee will decide which list is required or best-suited for your Chapter 7 bankruptcy filing.
The most common types of exempt properties are residences, vehicles, retirement accounts, and work property.
Qualifying for Chapter 7 Bankruptcy
First and foremost, you must complete a credit counseling course by an accredited agency at least 180 days before filing for Chapter 7 bankruptcy.
Afterwards, you have two options. The first option is passing a means test to determine your eligibility for making payments to unsecured creditors from disposable income. The second option is proving that your average monthly income over the past six months is less than the average income for your state’s same-sized household.
Keep in mind, you cannot file for Chapter 7 bankruptcy if you have been approved for it within the last eight years, nor being approved for Chapter 13 bankruptcy in the last six years. If you have previously filed for Chapter 7 bankruptcy but were not approved, you have to wait 180 days before filing again.