What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is a process provided for under United States federal law that eliminates most unsecured debt and allows people to keep or surrender secured debts such as car loans and mortgages.

Some common debts that are wiped out in a Chapter 7 are credit cards, lines of credit, medical bills, collection judgments, overdraft accounts, and deficiencies from repossessed vehicles and foreclosed homes. Even federal and state income taxes that are older than three years can be eliminated in a Chapter 7.

Typically, the only debts that are not eliminated are student loans, child support, alimony, taxes incurred within the last three years, and restitution.

Chapter 7 bankruptcy is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds are distributed to creditors according to the priorities established in the Bankruptcy Code.  However, in most consumer cases, liquidation rarely occurs as there are no “non-exempt” assets to liquidate and most assets that someone owns are protected.

When someone files Chapter 7, they can keep 100% of their retirement accounts, household items and furnishings, clothing, and jewelry that is not excessive.  In Colorado, a debtor can keep up to $60,000 of equity in their home and $5,000 of equity in a car.  The reality is that most people keep the things that are important in order to obtain a fresh financial start.

Chapter 7 is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships.  Eligibility to file Chapter 7 is determined by the means test instituted with the 2005 amendments to the bankruptcy code and depends on one’s gross income and family size.

Although filing Chapter 7 is on a person’s credit for ten years, most people recover within two to three years.  People can buy cars after filing Chapter 7 (albeit at higher interest rates), obtain new credit cards, and even purchase a home under FHA guidelines within three years of filing.

A benefit to filing Chapter 7 bankruptcy is that it puts into effect something called an “automatic stay.”  The automatic stay immediately stops creditors from trying to collect money, filing a lawsuit, repossessing a vehicle, or foreclosing on a home.  Filing Chapter 7 bankruptcy will even stop a wage garnishment.

It is important to meet with an attorney when filing a Chapter 7 bankruptcy because most people who try and file themselves are unaware that some assets, money in the bank, tax refunds, timeshares, and other property can be taken by the trustee. However, with proper planning, those issues can be avoided.

For more information about Chapter 7 bankruptcy, call the experts at Heupel Law, (720) 319-8900.