Chapter 7 bankruptcy protection allows debtors to get rid of most of their debts and start over with a clean slate. However, it also has its drawbacks, including the loss of property and a depressed consumer credit score. Chapter 7, also called "liquidation" or "straight bankruptcy," is the process by which a debtor's assets are sold, creditors receive payment, and you are then free from your debts. You must be eligible to file for bankruptcy, and the rules vary depending on the type of case you want to file. Bankruptcy laws changed significantly in 2005, making it harder to qualify for Chapter 7 relief. This section contains in-depth information about Chapter 7 bankruptcy, including eligibility under the "means" test, types of debts that cannot be discharged, and other tips to help you with the process.
Who Can File?
In order to file for Chapter 7 bankruptcy you must meet certain eligibility requirements, including the "means test." If the debtor fails to meet Chapter 7 requirements, a bankruptcy court can convert the case to a Chapter 13 bankruptcy. With the exception of disabled veterans that file to eliminate debt that was incurred while on active military duty or filers with debt that primarily came from operating a business, all other filers must meet Chapter 7 requirements.
Bankruptcy Exemptions: Chapter 7
Chapter 7 bankruptcy is sometimes referred to as liquidation bankruptcy because it involves gathering the property or assets of the filer, and then selling them to pay off as much debt as possible before the rest of the debt is "discharged" or eliminated. Bankruptcy law, however, protects some kinds of property from being sold off to pay these debts. These protections are called exemptions and include real estate such as a residence, automobile, certain personal property, and wildcard exemptions (a catch-all for property that doesn't fit into a designated category). When determining what is considered exempt, many states allow you to choose and use the state's definition of exempt or the list set out by federal law. Some states require you to use the state's list. Be sure to check your state's laws to find out what applies to your state.
Exempt vs. Non-exempt Property Under Chapter 7
Some property simply cannot be protected from creditors, even when filing for bankruptcy. Property that is not exempt may include expensive musical instruments, unless the debtor is a professional musician; collections of stamps, coins, and other valuable items; and family heirlooms. Cash, bank accounts, stocks, bonds, and other investments, a second car or truck, or vacation home likely will not be exempt.
How a Bankruptcy Attorney Can Help
Getting the right help when you file for bankruptcy is crucial to its success, whether you file on your own, get a lawyer, or use a bankruptcy petition preparer. Consider seeking a consultation with an attorney to help you decide whether you need legal representation or can simply go it alone. Many bankruptcy attorneys offer initial consultations free of charge.