In a Chapter 7 bankruptcy, a debtor files court papers asking that certain unpaid debts be wiped out or discharged. A debtor is a person who owes money to someone else.
The debtor is allowed to keep some of their income and property. The property that the debtor is allowed to keep in bankruptcy is called exempt property. The property the debtor can't keep is sold to pay off their debts.
Most debts are canceled after a Chapter 7 bankruptcy, which means the debtor no longer owes them. But the following debts can't be canceled in a Chapter 7 bankruptcy:
- Child support
- Most tax debts
- Student loans
- Secured debts
These debts must still be listed on the bankruptcy papers filed with the court, but they can't be wiped out.
Chapter 7 bankruptcy also stops wage garnishment unless it is for child support or alimony.
Filing joint bankruptcy with a spouse
If a debtor is married, they don't have to file a joint bankruptcy with their spouse. The debtor can choose to file for bankruptcy alone. However, if the debtor is married and filing alone, they still have to include their spouse's income on some bankruptcy forms.
What to consider before filing for bankruptcy
Filing for bankruptcy is not a good idea for everyone. It is a serious step and you should only file for bankruptcy if you know it will help you. You should talk to a lawyer before filing if possible.
Reasons to file:
- Most debts are discharged (wiped out), giving a debtor a fresh start;
- Bankruptcy stops wage garnishment and harassment by collection agencies;
- Foreclosures and repossessions are stopped and cannot move forward unless the court allows;
- You can keep exempt property;
- You can stop utility shutoffs, or restore service after paying a reasonable deposit, then pay only for current service;
- Employers and public agencies cannot retaliate against you for filing bankruptcy; and
- If your driver's license was suspended for not paying a debt that is dischargeable in bankruptcy, you can get your license reinstated.
Reasons against filing:
- Some debts, like student loans, might not be discharged (wiped out);
- Bankruptcy stays on your credit rating for 7 to 10 years;
- Getting credit may be harder or more expensive;
- It can cause strain in relationships with some creditors and cosigners;
- You may have to return property that is not paid for (Chapter 13 can be used to save some additional property);
- You can only get a Chapter 7 discharge once in an eight year period; and
- You may be able to protect your income and property without filing bankruptcy.
Filing for bankruptcy will not help you if you are collection proof. You are a collection proof debtor if all of the following are true:
- You have no income, your take home pay from work is below $371.25 a week, or your income is only from a protected source like public benefits, child support or Social Security.
- You do not own a home, or own one with less than $15,000 in equity. Equity is the difference between how much is owed on the mortgage and how much the house is worth right now.
- You do not own a car, or own one with less than $2,400 in equity.
- You do not have personal property, including money in bank accounts, worth more than $4,000.
If you are a collection proof debtor, you do not need bankruptcy to stop debt collectors from contacting you. You can use our Letter from Collection Proof Debtor to ask the debt collectors to stop contacting you.
If you can't afford to pay the fee at all, you can apply for a fee waiver.
Property you can keep
When you file for bankruptcy, you can keep some of your property. This is called exempt property. The exemptions come from your equity in the property. Equity is the value of your interest in the property minus any debt you owe on it.
The following are exempt property:
- Up to $15,000 of equity in a home
- Up to $2,400 of equity in one motor vehicle
- Up to $4,000 of personal property of any kind (wild card exemption)
- Up to $1,500 of tools of the trade
- Necessary clothing
- Pension benefits and some retirement accounts, like 401Ks and IRAs
Debts that aren't canceled
A Chapter 7 bankruptcy does not cancel all forms of debt. A Chapter 7 bankruptcy won't cancel money owed for the following:
- Unpaid child support payments
- Unpaid maintenance or alimony payments
- Unpaid fines
- Student loans
- Most unpaid state and federal taxes
- Criminal restitution orders
- Debts due to fraud, theft or embezzlement
- Damages to another person caused by drunk driving or conduct done on purpose
- Debts from a property settlement in a divorce
- Some other types of debts
There are certain things a bankruptcy cannot do, such as:
- Cancel non-dischargeable debts (see above)
- Get rid of a security interest, such as a mortgage or security in a car
- Stop an eviction, if the eviction court already entered an Order of Possession before the bankruptcy was filed
- Protect cosigners, unless they also file bankruptcy
- Release you from credit card debts that happened right before the bankruptcy was filed
- Discharge debts that are incurred after the bankruptcy is filed
- Allow you to discharge debts the court decides you can afford to pay, if you have enough income
- Allow you to keep valuable property, such as a vacation home, an RV or expensive jewelry
You can file for Chapter 7 bankruptcy if you meet two requirements:
- You have not received a Chapter 7 bankruptcy discharge in the last 8 years
- You pass a means test