Chapter 7 Bankruptcy – Debts are Wiped Away
Chapter 7 Bankruptcy is the most common type of Bankruptcy. It is the kind of Bankruptcy where the debtor does not set up a payment plan to pay creditors. The debts are simply wiped away (there are some exceptions), and the debtor gets a Fresh Start. If there happen to be any unprotected assets, they will be sold for the benefit of the creditors by the Bankruptcy Trustee. But in most consumer cases, all the debtor’s assets are protected by the exemption laws, so the debtor does not lose any property.
Clears Away Most Debts
Chapter 7 Bankruptcy clears away most debts. Certain kinds of debts are not cleared away, such as child support, student loans, and most taxes (sometimes you can clear away old IRS income taxes). You can also elect to keep or “reaffirm” certain debts, such as car payments and house payments.
Credit Card Debt
Overwhelmingly, the most common debt that people use Chapter 7 to eliminate is… CREDIT CARDS! The credit card industry is set up to get people into debt, and then they do everything possible to make money off that debt (interest payments, penalties, etc.). Because of this aggressive lending over the years, many people have unmanageable credit card debt.
Medical Debt is one of the leading causes of Chapter 7 Bankruptcy. Some people have to file for Bankruptcy because of medical bills, but most Bankruptcies have medical bills that help contribute to the Bankruptcy. Luckily, Medical Bills are almost always cleared away by a Chapter 7 Bankruptcy.
Loans and Lines of Credit
Unsecured loans, personal loans, lines of credit, etc., are treated similar to credit cards. As long as they are not tied to collateral such as a house or a car, they are considered unsecured and will be wiped away by Chapter 7. If they are tied to collateral, then you would have to give back the collateral in order to clear away the debt.
During difficult economic times, many people turn to Payday Loans to help make ends meet. Payday Loans have interest rates that are sometimes over 1,000% APR. They create a vicious cycle that you cannot get out of… Unless you file a Chapter 7 of course! Payday loans are almost always discharged by a Chapter 7 Bankruptcy.
Foreclosures and Repossessions
When you lose a house or a car in a foreclosure or repossession, the bank still holds you responsible for what is called the “deficiency” or the difference between what you owed them, and what they got when they resold the property at auction. A Chapter 7 Bankruptcy will clear away any deficiency you may owe after a repo or foreclosure. If you currently still have a house or a car that you cannot afford, you can “surrender” it in the Chapter 7 (give it back to the bank), and they can never again come after you for the debt (it is discharged). So a Chapter 7 is an opportunity to not only get out of unsecured debts, but also to get out of a house or car that you can no longer afford.
Did you ever have to break a lease? Sometimes you have to move out of your apartment and they refuse to work with you. And other times you might have a commercial lease on a business that went bad. A Chapter 7 will clear away any debt associated with a broken lease. However, if you are going to break the lease while you are in the bankruptcy, the landlord can hold you responsible for rent that accrues after the filing date. So be sure to vacate the premises sometime before your case is filed.
If you have been sued, and lost, this means that the person who sued you has a judgment against you. Most common are judgments from apartments, credit cards, and debt collectors. These are all cleared away by a bankruptcy. Even judgments for other situations, such as business contracts and car accidents can be cleared away. There are some exceptions, however. For example, if you have a judgment against you from a car accident that you caused while you were drunk, that is not dischargeable.
As a general rule, taxes are not discharged by a Chapter 7 Bankruptcy. However, if your tax debt meets certain qualifications, it is possible to discharge it. The qualifications include that the tax debt must be 3 years old (counting from when the return was due… usually April 15th of the following year), the tax return must have been on file with the IRS for at least 2 years, and the tax debt must be regular income tax debt. Even if you if you meet these qualifications, it still might not be discharged because of other IRS rules. You should always discuss the dischargeability of taxes with a Bankruptcy Attorney.
Chapter 7 takes about 3-4 Months
Once your attorney files your bankruptcy case, the “automatic stay” is put into place, which means creditors are not allowed to call you or send you letters. 4-6 weeks after your case is filed, you will have to go in person to your “Meeting of Creditors,” also called a “341 Meeting.” This meeting lasts only a few minutes, and you will be asked a few questions about your financial situation. It is unlikely any creditors will show up. About 60-90 days after your Meeting of Creditors, you will receive a Discharge Order from the court, which eliminates your dischargeable debts.
A Discharge Order is Powerful
If creditors keep harassing you after your case is filed, that is called a “Stay Violation.” If creditors keep harassing you after your Discharge Order is issued (including leaving debts on your credit report), that is called a “Discharge Violation.” You can sue a creditor for either one of these violations, resulting in them paying you settlement money.