What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a liquidation bankruptcy used to escape debts and regain control of your finances by having most of unsecured debt legally discharged by a bankruptcy court.
Unsecured debt generally includes credit card debt, medical bills, and personal loans
However, in nearly all cases, it does not discharge student loans, tax debts, alimony, or child support.
Chapter 7 is the quickest, simplest, and most common type of bankruptcy. According to the American Bankruptcy Institute (ABI), nearly 70%, of bankruptcy filings are Chapter 7, and it is generally believed that the courts’ Chapter 7 discharge (debt-forgiveness) rate for attorney-represented filers is nearly 95%. In other words, if you qualify to file and hire an attorney, you probably will succeed, and your debts will be discharged. It is worth noting that self-represented filers are generally only successful about 55% of the time.
Some of the difference can be explained by this first hurdle: Not all applicants qualify for Chapter 7 bankruptcy. The court applies a means test to each Chapter 7 filing. This test examines financial records to determine if the filer’s disposable income is below the median income for the state. The means test income level varies by state but can be calculated using Office Form 122A2.
Most Chapter 7 bankruptcies can be completed in less than six months.
Dischargeable debts under Chapter 7 include:
- Credit card balances (including overdue and late fees)
- Collection agency accounts
- Medical bills
- Unsecured personal and payday loans
- Mortgage or automobile loans for which you are unable to pay (but creditors can reclaim the house or vehicle)
- HOA fees (if you surrender the home or condo)
- Utility bills
- Civil court judgments (not based on fraud)
- Social Security overpayments
- Veterans’ assistance loans and overpayments
Non-dischargeable debts under Chapter 7 include:
- Child support
- Student loans, unless significant hardship can be shown
- HOA fees (if you keep the home or condo)
- Personal injury debts owed resulting from an event while you were intoxicated
- Unsecured debts intentionally unaccounted for in your filing
- Tax liens, unless the debt is old and the burden is heavy
- Secured debts