What is Chapter 7?
Chapter 7, also referred to as liquidation bankruptcy or straight bankruptcy, is the most common type of bankruptcy filed in the country today, both by individuals as well as businesses. When you file for bankruptcy under Chapter 7, the court appoints a trustee to oversee the whole process. The trustee is legally authorized to sell your assets to pay off your creditors. Certain assets are usually exempt from this process to give the debtors an opportunity for a ‘fresh start'.
What Kind of Debts Are Discharged Under Chapter 7?
The most common types of debts discharged under a Chapter 7 bankruptcy include credit card payments, medical bills, utility bills, dishonored checks (does not apply for check fraud cases), automobile accident claims (does not apply for drunk driving cases), civil court judgments (does not apply for judgments based on fraud), repossession deficiency balances, and personal loans from family members, friends, employers, and acquaintances.
For businesses, unsecured business debts and financial obligations under contracts and leases are also discharged under Chapter 7.
What Kind of Debts Are Not Discharged Under Chapter 7?
Alimony, child support, fines and penalties imposed by courts, recent back taxes, money borrowed from pension plans, student loans, and certain debts and cash advances taken 70 to 90 days before you file for bankruptcy are usually not discharged under Chapter 7.
Similarly, if you are a business owner, only your personal liabilities for business debts are discharged under the bankruptcy process. The business can still be held liable for debts, especially if it is a corporation or an LLC. In such cases, you have to file a Chapter 7 business bankruptcy or sell off your business' assets to pay off the creditors to the extent possible and then dissolve the business entity.
Who is Eligible to File for Bankruptcy Under Chapter 7?
A business or an individual has to pass the ‘means test' to become eligible to file for bankruptcy under Chapter 7. The means test is devised to make sure only those who are truly unable to pay their debts off are allowed to file for bankruptcy.
The test is a two-step process. In the first step, your current monthly income is calculated and compared against the median income for a household similar to yours in the same state. If your income is less than the median income, you are eligible for Chapter 7. If it is more, the second step of the test comes into play.
In the second step, your disposable income (after paying for your bare necessities and certain allowed monthly expenses) is calculated. If the disposable income is too meager, you might still qualify for a Chapter 7 bankruptcy. If it exceeds a certain level, you might be asked to file a Chapter 13 bankruptcy, in which you can pay off your debts in small installments over a period of time.
How Long Does it Take to File for Chapter 7 Bankruptcy?
The process could take four to six months. It might take longer if your trustee asks you for more documents to support the claims about your financial situation or if it takes too long to sell off your properties.
How Often Can You Get Your Debts Discharged Under Chapter 7?
Under Chapter 7, you can get your debts discharged every eight years. Similarly, you have to wait for six years to obtain a Chapter 7 bankruptcy discharge if you have previously filed for a Chapter 12 or Chapter 13 bankruptcy.
How Long Does it Remain on Your Credit Report?
A Chapter 7 bankruptcy generally remains on your credit report for a period of ten years.