Back to Basics: Chapter 7 Bankruptcy

The Basics

Filing for Bankruptcy can be the first step in catching up on your debt or starting over with a clean slate. When filing under Chapter 7 Bankruptcy, some or all of the debt you owe will be cleared.

However, there are some exceptions and consequences to consider. For example, debts like child support and college loans cannot be filed under Chapter 7. Filing for bankruptcy also can result in loss of physical property and a major hit to your credit. If you have exhausted all your options for getting rid of debt and are considering filing for Chapter 7 bankruptcy, make sure your bankruptcy attorney is aware of these exceptions and consequences.

While filing for Chapter 7 Bankruptcy can give you a financial reset, there is a lot to know and learn before taking this legal jump. Finding the perfect lawyer that will understand your financial situation can make this process a lot easier. It is important that you make yourself aware of all the steps of this lengthy process, as well as the setbacks. Here are the big things you need to know before, during, and after filing for bankruptcy:

What Do You Mean By Financial Reset?

Filing for Chapter 7 Bankruptcy tells creditors to take a step back. Creditors are temporarily stopped from trying to collect from you while you are going through the process of getting your debts discharged. This allows for some time to breathe and figure out the next steps without the pressure of creditors on your back.  

What Can I Lose?

In most cases, giving up physical assets is required to help balance out the debt. Each state has its own laws when it comes to which of your property falls under exempt or nonexempt assets. Exempted assets are items/properties that the state cannot take to balance your debt. Nonexempt assets are items/properties that CAN be taken up by the state as payment for your debts. The typical items that are considered nonexempt assets include:

• Property that is not your primary home
• A newer model vehicle with equity
• Investments
• Valuable artworks
• Jewelry

Having a knowledgeable attorney makes figuring what your state considers exempted or nonexempted property much easier.

The Process

There are a couple of things you have to do before your debts can be discharged.

First, before you can file, you must attend a credit counseling program from a court-approved agency. Most times this can be done online and must be done at least 6 months before filing.

The next step is getting all your files in a line. The most important form to have is the general Chapter 7 bankruptcy form called the Voluntary Petition. You will also need to gather multiple files that list all the people you owe money to and their mailing addresses.

Once all your forms are completed, you will file all of them at the same time with your local bankruptcy court clerk. Turning in these forms is giving complete control of your property and debts to the court, and activates the “automatic stay.” The automatic stay stops creditors from trying to collect money or property from you.

Your files are then given to a bankruptcy trustee who will examine all of your forms and declare what assets are exempt and nonexempt.

Then you will meet with this trustee and any creditors that chose to be present and answer questions about your debt and financial history under oath.

After your meeting, the creditors and trustee have 60 days to allow some debts to be discharged or to object the discharge. If your debts have been discharged, creditors will permanently stop trying to collect on these particular debts.

You do not have to go into this battle alone. Having an attorney present during the process of filing for bankruptcy takes some of the load off your shoulders and guarantees you are taking all of the correct steps.

Accumulating debt takes a toll on your credit. Filing bankruptcy is no different. The weight of the impact that filing for bankruptcy has on your credit will depend on where your score was before filing and previous financial history. Chapter 7 bankruptcy will remain on your credit for 10 years after filing. The major consequences seen from this is higher interest and fees, but getting an approved mortgage is not impossible post-bankruptcy.  

Once you have discharged your debts, you can start to rebuild your credit by paying bills on time, keeping a low credit card balance, and limiting your applications for new credit.