Chapter 7 Bankruptcy
Is Chapter 7 Bankruptcy Right for You?
Chapter 7 bankruptcy offers powerful protection for people who have more debt than they can hope to pay and want to rebuild their financial lives. Filing for Chapter 7 protection is not an admission of defeat. It is a step toward creating a more stable financial future for yourself and your family.
How Does Chapter 7 Bankruptcy Work?
In most Chapter 7 bankruptcy cases, an automatic stay takes effect as soon as the bankruptcy petition is filed. The automatic stay is a court order prohibiting creditors from taking any further collection action until the stay is lifted. Some of the most common types of collection action halted by the automatic stay include:
- Creditor phone calls
- Collection letters
- Wage garnishment
- Automobile repossession
- Foreclosure actions
In theory, non-exempt assets may be liquidated (sold) to pay part of the outstanding debt. However, most people who file for Chapter 7 bankruptcy don’t have any non-exempt assets, and so do not lose any property. The main reasons for this are:
- Bankruptcy exemptions protect many assets, such as personal property and a certain amount of equity in your home and car; and
- People who do have non-exempt assets that they want to keep can often choose to file for Chapter 13 bankruptcy instead
In most bankruptcy cases, the petitioner never appears in court. The only required appearance for most debtors is at a meeting of creditors, also called a “341 hearing.” At this meeting, the bankruptcy trustee and creditors have an opportunity to ask questions about the petitioner’s income, debts and assets. This may sound intimidating, but it is usually quick and painless. Often, no creditors appear for this meeting and the whole process is completed in about fifteen minutes.
Then, creditors are allowed time to file objections. In most cases, no objections are filed, and the case proceeds to discharge.
The Chapter 7 Bankruptcy Timeline
The timeline for a Chapter 7 bankruptcy case varies depending on the issues involved in the case. In many cases, it is possible to get a discharge order in about four months and begin building a stronger financial future immediately afterward.
The Chapter 7 Discharge
When a discharge is entered in a Chapter 7 bankruptcy case, discharged debts are legally eliminated. That means the bankruptcy petitioner doesn’t have to make payment on those debts.
Most unsecured debts can be discharged. This includes debts such as:
- Medical debts
- Credit card balances
- Payday loans
- Unsecured personal loans
- Unpaid utility bills
This type of debt can usually be discharged even if the creditor has already filed a lawsuit and obtained a judgment, or already has a wage garnishment order. A creditor who tries to collect on a discharged debt can be sanctioned by the court. In extreme cases, a creditor attempting to collect discharged debt may even have to compensate the former debtor.
After the Bankruptcy Discharge
Many people are uncertain about bankruptcy because they have heard that bankruptcy “ruins your credit.” It is true that bankruptcy is a negative on your credit report. However, most people who are considering bankruptcy already have a number of negative items weighing down their credit scores.
Often, those who file for Chapter 7 bankruptcy protection find that their credit scores begin to improve within months of receiving a discharge. Many also discover opportunities opening up to them, such as the ability to finance a vehicle.