Question: Should I File Chapter 7 Bankruptcy?
Chapter 7 is considered a straight-forward bankruptcy. Under the Bankruptcy Code, Chapter 7 provides for liquidation – which is the sale of your nonexempt property – with the distribution of the proceeds of the sale of your property, going to your creditors.
The information here will help you understand Chapter 7, but it’s advisable that you speak with an attorney about the specifics of your case.
Is Chapter 7 a good option for clearing my debts?
Chapter 7 is a popular option which can be summarized as follows:
- it provides asset protection
- not all assets are liquidated
- a Chapter 7 takes 3 months to obtain a discharge
- proceeds of liquidated assets are used to pay creditors
- it allows the discharge of personal debts, medical bills, loans, credit cards
- collection calls by creditors are stopped
- you can file once every 8 years
Plus & Minuses of Chapter 7 Bankruptcy
Also known as Chapter 7 / Debt Cancellation
|+ (Positives)||– (Negatives)|
|Fast 90 days debts are discharged||Embarrassment|
|Least Expensive Option||Other Psychological issues—feeling of failure|
|Passing Credit score can be obtained faster than DS||Remains on credit report for 10 years|
|12–14 months to a passing credit score||Debt Settlement might be more preferable than a Chapter 13|
|Automatic Stay against all Creditors||Chapter 7 might not be available due to income and expenses, can’t pass Means Test, assets might not be exempt, previous filing might be a bar.|
If you filed for Chapter 7 within the last 8 years, you can’t obtain a discharge of your debts if you file a Chapter 13. You can reorganize your debts if you are trying to save your home but you can’t obtain a discharge of your debts.
What is a Chapter 7 liquidation?
A Chapter 7 bankruptcy is called a liquidation because assets and debts are liquidated – or sold – with the proceeds of those sales being used to pay off remaining creditors you own money to. There are certain exempt assets which are taken out of the liquidation process.
Planning Your Schedule of Exempt Assets
Planning a Chapter 7 involves filing a schedule of exemptions in the hopes of protecting as much of your property or assets as possible from liquidation and the claims of your creditors.
Under the Bankruptcy Code, asset and property exemptions are protected from liquidation because the function of Chapter 7 is to give you a break from your debts and a chance to start over. It does no good if your creditors take the shirt off your back.
Exemption planning is one of the most important aspects of declaring bankruptcy, and it’s at the forefront of filing a chapter 7 bankruptcy petition.
Examples of non-exempt property or assets
Depending on their value, items you may have to liquidate in Chapter 7 are:
- cash on hand and in your bank account
- stocks and investment bonds
- second and/or third vehicle
- your vacation home and/or other real estate properties
- expensive collectable items like coins and stamps
- high value family heirlooms
Examples of property and assets that are exempt
Items which are exempt from liquidation in Chapter 7 can include:
- your car depending on it’s value
- essential clothing, home furnishing and household items
- home appliances, tools of the trade and most jewelry
- your pension and most of your unpaid wages
- the partial equity in your home
- public assistance benefits
- social security and unemployment compensation
- personal injury or wrongful death judgement awards
Chapter 7 includes a wildcard exemption which is a prescribed dollar amount that you can apply to property or assets that you wish to retain and not lose in the liquidation process. The wildcard exemption can be used to cover multiple assets and protect exposed equity as needed.
Who qualifies for a Chapter 7 discharge?
Even if you have low income, or no income at all, Chapter 7 can be an important option. You will most likely qualify for a Chapter 7 bankruptcy if:
- you have little or no money left after paying your necessary monthly expenses
- you rent, or if you have little to no equity in your home
- have only minimal assets such as household furniture and personal clothing
- you can’t pay back your existing debts
- you have completed the credit counseling requirement
- you have to have been a resident of the State for 180 days prior to filing a petition
You are also required to take the means test to determining if you qualify for a a discharge in Chapter 7.
The determination as to whether you qualify is based on your income over the past 6 months before you filed. In most cases, if you don’t quality for a Chapter 7, your case can be converted to a Chapter 13 filing.
These are the primary reasons creditors will object to your discharge
The typical reasons why creditors can object to your discharge are as follows:
- the debt was incurred as a result of fraud, embezzlement or larceny
- willful or malicious injury you have caused others
- accidents which involve drugs or alcohol
- concealment or destruction of property or financial records
- false statements
- withholding information from the Trustee
- failure to explain losses or respond to questions
During bankruptcy, you are required to disclose all your assets in your bankruptcy petition. Failure to disclose your assets will expose you to criminal liability.
In a Chapter 7, if it can be proved that you’ve submitted or made false statements under oath, you could face a Denial of Discharge in Bankruptcy, which allows a creditor or another party of interest to object to your discharge in it’s entirety.
Debts that are cancelled in Chapter 7
Examples of debts that are cancelled in a Chapter 7 discharge include, but are not limited to: medical bills, income taxes, personal loans, credit card debts, and property judgments. Other debts that can be cancelled are car repossession debts, payday loans, wage garnishments, accident claims against you, business debts and utility bills.
Income taxes can be discharged in chapter 7 if you meet the following requirements:
- the taxes are specifically income taxes
- the tax is more than 3 years old
- your tax returns have been filed
- your taxes has been assessed for more than 245 days
- there is no fraud or taxpayer protest
Can I keep my tax refund after filing chapter 7 in Connecticut?
There are certain cases where you can keep your tax refund in chapter 7 and case where you will have to turn it over to the trustee. For more details you can read our FAQ on how do taxes and bankruptcy work.
When does my bankruptcy start?
The moment your information filed received by the Court’s computer, your bankruptcy petition officially starts, and the Court’s Automatic Stay goes into effect. Your petitions can be filed via electronic filing using your computer.
Once your case is filed, and if it proves to be an asset case, your creditors will have 90 days to file a Proof of Claim which is a written statement along with documentation that money is owed to them. Typically, the government will have 180 days to file a Proof of Claim if funds are available.
Does the automatic stay stop creditor calls and harassment?
The Automatic Stay prevents any creditor from calling you, writing to you, continuing with a lawsuit or foreclosure, attaching your property or wages, or using any means to collect on a debt. All correspondence from creditors to you, must go through your bankruptcy attorney first.
What happens when the case is filed?
When your case is filed with the Court, a notice is generated. This notice is called the 341 Notice because under Section 341 of the Bankruptcy Coded it is entitled, Meeting of Creditors and Security Holders.
Under this section of the Code, there has to be a public hearing before a Court appointed Trustee, where creditors will have the opportunity to ask you questions about your bankruptcy petition.
Important links in the above information
Below is a summary of the links found on this page, or other links related to Chapter 7 in general.
- How Does Bankruptcy and Taxes Work?
- Chapter 7 Credit Counseling Requirement
- Chapter 7 Means Test Requirement
- Denial of Chapter 7 Discharge
- Filing Fees for Chapter 7 and Chapter 13
- Chapter 7 Statement of Intent
- Forms Needed For a Chapter 7 Filing
- Stopping Creditors with the Automatic Stay
- Do I Have To Pay My Mortgage in Chapter 7?
- Beware of fraudulent transfers or preference payments
- What happens at the 341 Meeting of Creditors?
You can compare the pros and cons of bankruptcy, debt settlement and debt management, on our options comparison chart for an overview of your options.