Chapter 7 bankruptcy is the most popular form of bankruptcy relief for individuals. The basic idea behind Chapter 7 is this: The bankruptcy trustee appointed to your case sells your property to pay off your creditors and ends with a discharge of qualifying debt, such as credit card balances, medical debt, and personal loans.
Most Chapter 7 bankruptcy cases take about four months to complete and move through the process without a hitch, but it’s not for everyone. Find out about some of the differences between Chapter 7 and Chapter 13.
Even though the trustee's job is to ensure that your creditors get paid as much as possible, many Chapter 7 debtors give up little, if any, property. State and federal laws allow a filer to "exempt" or protect particular property up to a certain dollar amount. If an exemption covers all of the property equity, you get to keep it. Because you're allowed to keep the things you need to work and live, most Chapter 7 filers protect everything they own and don’t lose any property. Find out more information about keeping your property in Chapter 7 and bankruptcy exemptions.
If you are current on your loan payments and you can exempt all of the equity, you'll be able to keep the house or car. If, however, you are behind on your loan payments, or you can't protect all of the equity, you will most likely lose it. In that case, Chapter 7 wouldn't be a good option unless you were okay with letting the property go. Here's why.
Mortgages and car loans are secured debts. You agreed that the lender could take the property if you didn't pay. Because of this, you can wipe out the balance in Chapter 7, but the lender will have the right to take the collateral, sell it, and apply the funds to the balance owed if you're behind on the payment. Even if you're current, however, if you can't protect your equity with an exemption, the trustee will sell the property.
Not everyone is eligible for a Chapter 7 debt discharge. You must take and pass the "means test" to qualify for Chapter 7 bankruptcy. If your income is lower than the state's median income for a family the same size as yours, you automatically pass the means test. If your income is over the state median, you'll get another chance to pass by subtracting your expenses. If you don't have enough left over to make a meaningful payment to your creditors through a three- to five-year Chapter 13 repayment plan, you'll qualify for Chapter 7. Find out which expenses will help you pass the means test.
Keep in mind that even if you qualify, the court will still evaluate whether you have significantly more income than you need to pay your monthly bills. The court will compare the figures on Schedule I: Your Income to those on Schedule J: Your Expenses to determine whether enough remains to make a meaningful payment to creditors.
Example. Suppose you make $5,000 per month, but your monthly budget shows you need only $4,500 per month. The court might order you to pay $500 per month through a Chapter 13 repayment plan, even if you qualify for Chapter 7.
Once you know that you qualify for Chapter 7 and that you can keep the property important to you, you'll be ready to file your case. Here's what will happen next.