How Does Chapter 7 Bankruptcy Work?

April 30, 2021

Now that the pandemic of Covid-19 is past its one-year mark, more and more people are beginning to realize that it truly has taken a devastating toll on their financial situation. Many people have been laid off, many businesses went under due to insolvency, and the debts just keep on coming.

In these kinds of situations, a mechanism of support is needed and fortunately the US legal system provides it – bankruptcy.

You may have heard of bankruptcy and consider it a taboo or something terrible, but it is actually in place to protect the people who are unable to service their debt at the moment. We reached out to those who know the ins and outs of bankruptcy at Law Offices of Mark L. Miller to find out a bit more about the most common type of bankruptcy – Chapter 7.

What Makes Chapter 7 Such a Common Choice?

Simply put, Chapter 7 bankruptcy enables you to discharge a large portion of your debt, meaning you will not pay it and it will be forgiven. If that sounds like a great deal, you should be aware that there are some caveats and rules that need to be followed.

Another thing that really helps a lot of people in a dire financial situation is that once they file for bankruptcy, their creditors have to stop calling them and harassing them to pay the debts. There is an immediate stay of payment until the situation is resolved. With the pressure of constant calls and mail from creditors, the debtor can focus on getting their life back on track.

What Gets Discharged in Chapter 7 Bankruptcy?

First and foremost, Chapter 7 can discharge all of your credit card debt, even the interest and late fees. This is one of the most common causes of filing for this type of bankruptcy. Another notable cause of bankruptcy are medical bills, which are also eligible to be discharged in your filing.

Other types of unsecured debts, such as business loans, utility bills, personal loans, and lease agreements are also eligible to be erased in your trial.

That being said, it is important to note that not all debt can be erased and forgiven. There are a few debts that are typically immune to Chapter 7 protections. Student loans, a very common debt that many people would gladly discharge as soon as possible, as well as taxes and child alimony all fall into this category.

What Happens When You File?

Once you file for bankruptcy under Chapter 7 rules, you will be assigned a trustee, a person who will review your finances and your property and decide what needs to be sold off to pay creditors and what you get to keep.

In most instances, you will get to keep your home and your vehicle, but owning anything more than that will likely result in those possessions being sold off to pay for your debts. Things like a second home, a second vehicle, or a boat are prime candidates for this treatment.

Does Everybody Get a Write-Off of Debts?

In short, no. In order to be granted a debt discharge, there is a means test. This test compares your income with the median family income for a family of your size. If your income is lower than the median, you will automatically be granted a write-off.

If your income is higher, however, you still get to deduce your overheads from the income. If even that amount gives you enough financial room to pay off your debts in full through Chapter 13 bankruptcy model (three to five years’ repayment program), you will not be granted Chapter 7 debt discharge, and this type of bankruptcy may not be suited for you.

Going through a complex web of rules and regulations can be quite daunting, which is why most people choose to go through with bankruptcy with the help of an attorney. A skilled bankruptcy lawyer will be able to tell you which model suits your specific situation best and how to get the best possible deal out of a bad situation.

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