What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy is typically referred to as a “fresh start bankruptcy.” Chapter 7 Bankruptcy allows you to discharge or get rid of all of your unsecured debts and keep most, if not all of your possessions including your car and your home. Unsecured debts are credit cards, store charge cards, gas credit cards, payday loans, personal loans, debts from repossessed property, utility bills, cell phone bills, and medical bills. In some cases, you will also be able to get rid of old income tax debts and property tax debts. You do have to qualify to file Chapter 7 Bankruptcy, but if you qualify and most people who need to file Chapter 7 Bankruptcy do, it is the fastest, most affordable way to get yourself out of debt and give yourself a fresh financial start.

Credit Card Debt

Credit card debts are typically unsecured debts. Unsecured debts are generally 100% dischargeable in a chapter 7 bankruptcy filing. There are some exceptions to the rule, like credit card debts incurred within 90 days or filing for bankruptcy or credit card debts secured by false pretenses or fraud. Credit card debts are the most common debt discharged in a chapter 7 bankruptcy filing. Some credit cards are secured debts in that the property you buy using the credit card is collateral for repayment. If you don’t pay the debt or have it discharged in bankruptcy, the creditor has a right to take the property back. In most cases, it costs more in legal fees to try to recover the property, so even if the creditor has a right to recover the property, he may choose not to and you can keep it. If you wish to keep the property without the risk of losing it to the creditor, you would have to reaffirm the debt. Reaffirming the debt simply means that you agree to legally honor the debt and not have it discharged in bankruptcy. Your bankruptcy lawyer can review all of your credit cards and explain how the chapter 7 bankruptcy will affect each credit card debt that you have.

Personal Loans and Payday Loans

Personal loans are typically unsecured debts and unsecured debts are generally 100% dischargeable in a chapter 7 bankruptcy filing. If the personal loan is a secured debt, meaning you pledged property as collateral, you will have the choice of either keeping the property and continuing to pay on the loan, or relinquishing the property and having the loan discharged. Your bankruptcy lawyer will be able to advise you regarding personal loans and how the bankruptcy filing will affect them. Payday loans are becoming increasingly more common these days. Payday loans are unsecured debts and are therefore 100% dischargeable in a chapter 7 bankruptcy filing.

Medical Bills

Medical illness is one of the most common reasons to file a chapter 7 bankruptcy. In most cases, a medical illness is financially devastating to a debtor and the bills are just too much to handle. Chapter 7 bankruptcy will eliminate all of your unpaid medical bills no matter how much you owe. Collection agencies are hard at work trying to collect medical bills on behalf of doctors and hospitals. These debts will ultimately find you in court as most collection agencies will file suit against you to collect the debt. When this happens, you are responsible for not only paying the medical bills, but the attorney fees, the collection agency fees, the court costs, and the list goes on. If you have medical bills that you cannot afford to pay or you are being harassed or sued by a collection agency, filing a chapter 7 bankruptcy petition will get rid of the debt, the collection agency, and the lawsuit forever. You don’t have much time to waste if you have been contacted by a collection agency before you are sued and your wages are garnished.

Repossessed Cars and Car Loans

Car loans and car leases are secured debts until your car has been repossessed. A secured debt is one where the property is pledged as collateral for repayment of the loan or payment of the lease. If you don’t pay the loan or lease, the finance company is entitled to take back the vehicle. However, once you give up possession of your car, any remaining debt on the car loan or car lease is 100% dischargeable in a chapter 7 bankruptcy case as an unsecured debt. You will be able to keep your car if you agree to legally honor the car loan or car lease after the bankruptcy and you remain current on your payments. Your bankruptcy attorney will prepare and file with the court the special documents you need to keep your car in a bankruptcy.

Home Foreclosure Debt

If your home is in the process of being foreclosed or has already been foreclosed, you will probably end up owing the bank money after the foreclosure. This is referred to as a deficiency. A mortgage loan is a secured debt until the foreclosure occurs. Once the foreclosure occurs and your house is taken from you, any remaining debt is now considered unsecured and 100% dischargeable in a chapter 7 bankruptcy. You don’t have to wait for foreclosure if you can’t afford to live in the house you own. If your home has just become too expensive to afford for any reason, you can walk away from it and the mortgage loan in a chapter 7 bankruptcy. Your bankruptcy lawyer will advise you on how to proceed if you are faced with this type of financial situation.

Unpaid Taxes

The three most common types of taxes that most people pay are federal and state income taxes, personal property taxes, and real estate taxes. These taxes are all treated differently in a chapter 7 bankruptcy case and your bankruptcy lawyer is the best source of advice on this subject. The most important thing to remember when filing for bankruptcy is that your income tax returns must all be filed in order for your case to be successful.

Incomes taxes owed to the federal government and to your state are known as unsecured priority debts and are not dischargeable unless certain circumstances exist. These certain circumstances generally involve how old the taxes are and whether or not you filed your tax returns on a timely basis. Generally speaking, income taxes must be at least 3 years old and have been filed at least 240 days prior to the bankruptcy filing in order to be dischargeable.

Personal property taxes are also unsecured priority debts as are income taxes, but the rules for discharge are different. Personal property taxes can be discharged as long as they are at least one year old. Your affordable bankruptcy attorney will be able to tell you which taxes are dischargeable and which are not when preparing your case.

Real estate taxes are secured debts and must be paid just like a mortgage loan must be paid if you wish to keep your house. If you don’t pay your real estate taxes, the town will place a tax lien on your home and eventually foreclose the lien. A tax lien foreclosure is a lawsuit against your ownership interest in the house which seeks to have your house sold so that the delinquent real estate taxes are paid.

Taxes are very complicated and the information provided above is designed to give you a brief overview and understanding of how your taxes are handled when you file for chapter 7 bankruptcy. A bankruptcy attorney has special training, skill, and experience in dealing with these matters and your specific situation should be discussed during your free bankruptcy consultation.

 Do I Qualify to File Bankruptcy?

Chapter 7 bankruptcy filers do need to qualify in order to file. To qualify for a Chapter 7 bankruptcy filing, you must not have filed within the past eight years and your household income must be below the median income for the state in which you reside. Generally speaking, your household income for the last six months is averaged and then multiplied by 12 to arrive at your qualifying income. Your qualifying income is then compared to the median income of your State for a similar-sized family. If your qualifying income is below the median income you qualify to file a Chapter 7 Bankruptcy. If your qualifying income is slightly above the median income you still may qualify, but that formula is too complicated to describe here. Your attorney will be able to determine your eligibility for filing Chapter 7 using all the possible eligibility methods. If you don’t qualify to file under Chapter 7, you may still file under Chapter 13.

What About Debt Settlement?

Don’t be fooled by all those ads for credit counseling, debt consolidation, and debt settlement firms that promise to get you out of debt for pennies on the dollar. Most debtors who try to get out of debt by using one of these organizations never complete the program and end up losing all the money they have paid into the plan. They also don’t tell you that you have to pay their fees first before they will send any money to the credit companies, that every credit card company and creditor must agree to participate in the plan (which many will not), and that any reductions in your principal balances are subject to state and federal income taxation. Filing for bankruptcy is the most affordable way to get yourself out of debt and bankruptcy is not a taxable event. You will not have to pay any taxes on the debts that are discharged!

Will My Credit Be Ruined Forever?

No, your credit will not be ruined as a result of a bankruptcy filing. In most cases, your credit rating is already very low. A bankruptcy filing is the most effective and affordable way to rebuild your credit score and your creditworthiness. One component of your credit score is your debt to income ratio. Right now, your debt to income ratio is probably quite high resulting in a low credit score. Once you eliminate your debt in the bankruptcy, your debt to income ratio drops dramatically and your credit score will increase as a result.

A bankruptcy filing will generally remain on your credit report for 7 to 10 years. While this information is on your credit report, it doesn’t mean that you won’t be able to get credit in the future. In most cases, you will be offered credit cards and be eligible for other types of non-real estate credit within 6 to 12 months post-bankruptcy. It generally takes about 2 years post-bankruptcy to become eligible for mortgage debt. Be very careful about getting back into the credit card game after your bankruptcy. It is much more desirable to pay as you go with cash, checks, or a debit card.

Do I Get to Keep My Possessions?

In most cases, you will be able to keep your possessions when you file for bankruptcy. The bankruptcy laws allow you to keep a certain value of property where the value is based upon the debtor’s equity in the property. This property can be anything from household goods, bank accounts, jewelry, electronics, computers, etc. The type of property doesn’t matter as much as its value. The amount of property you can keep or that is considered exempt depends on a number of factors, for example, whether you own a home or rent. The majority of debtors who file Chapter 7 and Chapter 13 bankruptcy cases are able to keep all of their property. This is commonly referred to as a no-asset case. Your bankruptcy attorney will be able to tell you what property you can keep and what property may not be exempt.