Should I file for Chapter 7 Bankruptcy?

Bankruptcy is a legal process to help people who are unable to pay their outstanding debts.

Chapter 7: The court cancels (discharges) your debt. Your bills “vanish.” You are no longer responsible for them. You get a clean slate and a chance to start over with no debt.

Chapter 13: The court puts you on a 3 to 5-year payment plan to repay your debts. This can help you try to avoid foreclosure of your home or to pay off other debts, such as traffic tickets or legal financial obligations (LFOs), that you cannot discharge.

Probably.

The day you file for bankruptcy, the court issues a “stay”. This means all collection action, including garnishment, must stop immediately.

You can discharge most bills, including credit card debt, hospital and medical debt, debt owed to a former landlord, and debt owed due to the repossession of a vehicle.

You cannot discharge:

• Child support debt.
• Student loan debt unless you can show “undue hardship.”
• Most federal income tax debt.
• Legal financial obligations.
• Traffic tickets and fines (but you can discharge the collection and interest charges). Read My Driver’s License was Suspended. Can I Get it Back? to learn more.

You can only file for bankruptcy once every 8 years.

Before filing for Chapter 7, at least one of these should be true:

1. You have a lot of debt and income and/or assets a creditor could take.
2. You lost your driver license after being in an accident while uninsured. You need your license back.

If you are a homeowner:

You have a lot of debt and close to the homestead exemption amount of equity in your home. The homestead exemption is the equity value in your home that you can protect from creditors, even without bankruptcy. The homestead exemption amount is the greater of (a) $125,000; or (b) the county median sale price of a single-family home in the preceding calendar year.

• Equity is the amount of money you would keep after you sold your home and paid off the mortgage and other liens. You can find the median sale price of homes in your county.

Maybe not. To keep a secured property (like a car or furniture that creditors could repossess) when you file for Chapter 7, you must reaffirm (sign a new agreement on) this debt.

Reaffirmation may be a bad idea, especially if it is a high interest loan or for an asset worth less than you still owe. It can lead to more financial trouble that bankruptcy cannot fix. Always discuss reaffirmation of debts with a bankruptcy lawyer before reaffirming a debt with a creditor.

• You are not working.
• You do not have assets that creditors can take (garnish).
• Your income is protected from garnishment.

Examples: Creditors cannot garnish Social Security, Supplemental Security Income (SSI), unemployment benefits, Temporary Assistance for Needy Families (TANF) or Aged, Blind, or Disabled (ABD) benefits, child support you receive, retirement pensions, or federal student loan proceeds.

• Read Money that cannot be taken from you ("garnished") to pay off a debt to learn more.

If the creditor cannot collect from you, you do not need to file for bankruptcy.

• File only if you really need to. You can only file for Chapter 7 once every 8 years.
• If you file for Chapter 7, you should list all your debts in the bankruptcy petition. Generally, you cannot discharge debts not listed.
• Before filing, get a copy of your free credit report from all three credit-reporting agencies. The reports may list different debts so you want to get your report from all three agencies. Read Coronavirus (COVID-19): You can get a free credit report every week until April 2022.
• After you discharge your debts in a bankruptcy, check your credit report. All the discharged debts should show a zero (0) balance. If they do not, then immediately speak to the lawyer who helped you file the bankruptcy.

• It may be harder to get credit. Credit could cost you more. (Example: you may only be able to get credit to buy a car with a very high interest rate.)

* You can start rebuilding your credit immediately after filing for bankruptcy. Talk with a credit-counseling agency that does not charge for their services. Learn how to get a secured credit card, keep up with your debts that were not discharged, and how to make a budget.

• It will be on your credit report for 10 years.
• You will lose the credit cards you currently have.
• The court may not consider some belongings, such as an expensive car, exempt. You could lose them as part of the bankruptcy.
• Depending on the kind of debt, the court may not discharge all your debts in the bankruptcy.
• You cannot file a Chapter 7 bankruptcy again for eight more years.