Have you found yourself buried under debt and struggling to survive financially? If so, filing for bankruptcy may be the best option for you to get a fresh start with your finances. If you are considering filing for bankruptcy, you will need to determine which chapter you need to file for your specific financial situation. There are six different chapters of bankruptcy, however, most people will fall into either Chapter 7 or Chapter 13. In this article, we will focus on the most common filed form of bankruptcy – Chapter 7.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a filing in which the individual filing for bankruptcy has very few assets and is primarily delinquent in unsecured debt. Unsecured debt is debt in which the borrower did not put up any initial collateral in exchange for the credit. This is the most common form of bankruptcy filed. Unsecured debt includes:
- Medical Bills
- Credit Card Debt
- Payday Loans
- Past-Due Rent and Utilities
- Some Tax Debt
What Are the Steps to Apply for Chapter 7 Bankruptcy?
When filing for bankruptcy, you are petitioning the bankruptcy court to forgive your debt and relieve you of the financial commitment to your creditors. The application process can take as little as three months if you make sure to follow every step of the application correctly and in a timely manner. It is recommended to work with a bankruptcy attorney that understands the bankruptcy application process because a bankruptcy attorney will know what is required in the application forms, how the bankruptcy court operates, and the expectations of your appointed bankruptcy court trustee.
Step 1. Evaluate Your Exempt Assets
In every state, there are exemption laws that determine what items you will be allowed to keep if you file and are discharged with Chapter 7 bankruptcy. Before you begin your bankruptcy application, it is important to understand what property you own that will be exempt from the bankruptcy estate. Property that is exempt typically includes items that are necessary for working and living. Some examples of exempt property may include:
- Primary residence
- Automobiles up to a certain value
- Public benefits such as welfare, unemployment compensation, and social security disability benefits
- Necessary furniture, household goods, and appliances
- Items required to perform your profession
- Low-value personal items
A bankruptcy attorney will know how to protect as much of your essential property as possible before you file your application. It is important to understand what you may be able to keep, and what property you may potentially lose before you submit your application.
Step 2. Determine if You Are Eligible To File
Right now, you may be in a difficult financial situation, however, that does not mean that you will automatically qualify for bankruptcy. Bankruptcy is a legal matter, and as such there are laws and requirements that govern the entire bankruptcy application process. To determine if you are eligible to file, you must first pass the means test. The means test will evaluate your financial records including your income, expenses, and total debt and will also factor in the size of your family. To be eligible, your income, with everything considered, must be below your state’s median income. This process can be very time-consuming and complicated to understand everything that must be evaluated. Working with a local bankruptcy attorney can help make sure you don’t miss anything important during this step of your application.
Step 3. Redeem, Reaffirm or Surrender Secured Debts
This step of filing for Chapter 7 bankruptcy may come along with some difficult choices. If you have any secured debt, you will need to decide if you want to redeem, reaffirm or surrender it. Unlike unsecured debt, when you first begin your secured loan, you commit some form of property as collateral for your debt. When you decide to file bankruptcy, secured debts will need to be addressed separately, and you will make the decision of how you want to settle with the creditor. Your three options to address secured debt are:
- Redeem If you decide to redeem the property, you will need to pay the creditor a lump sum for the current market value of the property
- Reaffirm if you decide to reaffirm your debt, you agree that you will continue to pay your debt to the creditor as per your original contract, regardless if you are discharged with bankruptcy or not
- Surrender if you decide to surrender the property, you agree to let the creditor take possession to settle out your debt to them
It is important to evaluate your options when it comes to your secured debt. Discuss with your lawyer the different outcomes for each option to make sure that you are making the best decision for your specific financial situation.
Step 4. Beginning the Bankruptcy Application
There are dozens of forms that you must fill out to apply for bankruptcy. When you decide to start the application, make sure you have already gathered your financial records in one place so that you can reference them as you go. These forms will ask you to list:
- Income and expenses
- Creditor information
- Property exemptions
- The decision on how you want to handle Secured Debts
- Property transactions for the past 10 years
These forms can be complicated, and missing any piece of the requested information can affect the outcome of your application. It may be beneficial to have an attorney assist with completing the forms and ensure all the required information is included.
Step 5. Complete a Credit Counseling Course
This step is important to every individual that wants to file for bankruptcy as it is a requirement before you can submit your application. The bankruptcy court mandates that any individual interested in filing for bankruptcy must complete a certified credit counseling course before applying for bankruptcy. Your attorney can help guide you to the best option for your specific area and case.
Step 6. The Application Process
This step is the longest of the bankruptcy process and includes a handful of important items. Let’s look at the application process and what you can expect as your application is being reviewed.
- Filing your forms – Your attorney will help you file your petition and your case will officially be started. You have 2 weeks from the day you first begin your petition to file all necessary forms and documents required by the court. When you file your application, you will also need to pay the filing fee to the court. The fee to file for Chapter 7 bankruptcy is $335.
- Submit evidence to the bankruptcy court trustee – The bankruptcy court will appoint your case to a bankruptcy court trustee. The trustee will review your case and will ask you to submit documentation and financial records to validate the extent of your claim. The trustee will ask for everything from bank statements to tax returns to assess your financial situation.
- The Meeting of the Creditors – This part of the process may seem intimidating; however, it is fairly straightforward. During your application, you will be asked to have a meeting with your trustee. You will be asked to verify the information you provided and may ask for clarification on any questions they may have. Representatives for the creditors can join at this meeting, however, it is not guaranteed they will attend.
- Debt Counseling Course – While your application is in review, you will need to complete a second course to receive a certificate to submit to the court. If you do not complete this course, your petition will be rejected.
Step 7. The Trustee Makes Their Decision
Once you have completed all of the required steps in your application process, the trustee will make a final decision and recommendation to the bankruptcy court. If the trustee decides to accept your application for Chapter 7 bankruptcy, the court will issue an order that discharges you from the qualifying debt. Once you have been discharged from your debt, your creditors can no longer attempt to collect the debt and you can begin a new life of financial freedom. If the trustee rejects your petition, your attorney can start the appeals process to request a more in-depth review of your case.
Are You Ready To Apply for Chapter 7 Bankruptcy?
If you are ready to apply for Chapter 7 bankruptcy and start your journey towards a debt-free life, it is important to know all of your options and the requirements that will be asked of you during your application. The application process can seem complicated but working with an experienced bankruptcy attorney can help simplify the process and make sure that you do not miss any important steps along the way. Complete our free evaluation to be connected with an experienced attorney in your area to discuss the specifics of your case and determine the best options for your financial situation.