A Chapter 7 bankruptcy stops your creditors from collection attempts. What does that mean for you? It means lawsuits are stopped cold. It means collectors stop calling you three times a day. Credit card bills stop. So do medical collectors. And payday loans. And mostly everyone else you owe money* The phone stops ringing. The debt stops growing. Life starts getting back to normal.
A Chapter 7 bankruptcy is essentially a debt eraser. The basic idea behind a Chapter 7 bankruptcy is that the debtor surrenders non-exempt property to a Trustee, who liquidates it and distributes it equally amongst creditors. In exchange, the Debtor gets all his unpaid debts wiped out.
If that makes sense to you, you’re probably a bankruptcy attorney. Everyone else, please keep reading.
A Chapter 7 bankruptcy starts by filing bankruptcy paperwork with the local federal bankruptcy court. The person filing the bankruptcy is called the “debtor”. The bankruptcy paperwork will include a list of everything the debtor owns, everything the debtor believes he has a legal right to keep, everyone the debtor owes money, the debtor’s income and expenses, and other personal and financial information.
Soon after the bankruptcy is filed, the court clerk will assign a person to oversee the bankruptcy (the Trustee), set a date and time for a creditor meeting, and send notice out to all the debtor’s creditors. The debtor and debtor’s attorney attend the creditor meeting together at the Trustee’s meeting location. It is usually about 30 days after the bankruptcy is filed. It is rare for creditors to attend. It is generally just an opportunity for the Trustee to take testimony and verify that the information in the bankruptcy paperwork is correct.
A Chapter 7 bankruptcy is normally finished about 60 days after the creditor meeting. That’s when the Judge signs the “Discharge Order” that officially wipes out the debtor’s responsibility for any debts not reaffirmed (see more about that below).
The explanation above is simplified. A Chapter 7 bankruptcy is actually a complicated legal proceeding. If you file bankruptcy but don’t qualify, you risk having a dismissed bankruptcy on your credit report. If you make a mistake and don’t protect your stuff, you risk losing it. Once you file, you can’t just change your mind and stop the bankruptcy. Mistakes can be permanent. I do not recommend you try a Chapter 7 without an experienced attorney.
Here are answers to some of the common questions I see in Chapter 7 bankruptcies…
“Will I get to keep my stuff”? In most cases, yes. Your bankruptcy paperwork contains two important lists. The first is a list of everything you own, including houses, cars, boats, cash, financial accounts, legal claims, tax refunds, vacation homes, jewelry, firearms, household goods and furnishings, clothes, and more. The second is a list of everything you claim to have a legal right to keep. Anything that isn’t on the second list needs to be turned over to the Trustee. Texas is a very friendly state for bankruptcy filers because Texas laws are generous with letting you keep stuff. But, it is very easy to mess it up if you don’t know what you are doing. With the help of an experienced bankruptcy attorney, most people in Texas can make the right choices and keep their property. And, knowing what you are keeping and not keeping is something you should be fully aware of before the bankruptcy is filed.
“Can I choose which debts are included in my bankruptcy”? No. You are required to list all your debts. Mortgages, vehicle loans, credit cards, medical bills, past due utilities, tax debt, that money Aunt Peggy loaned you; all of it must be listed. Some of it you may keep paying, but all of it must be listed.
“What if I want to keep paying my mortgage and car loan; I don’t want to lose my house and car”? Usually not a problem. Your income and expenses are listed in your bankruptcy paperwork. If that paperwork shows you can afford the monthly payment and you are not currently behind on that monthly payment, you should have no problem “reaffirming” that debt. Without going into complicated detail, that basically means everything stays like it was with your mortgage or auto loan before you filed bankruptcy. Whether or not it is necessary or a good idea is too complicated to cover here.
“What if I want to keep paying a credit card”? Nobody is going to stop you from paying creditors after the bankruptcy. But, if you want to pay a creditor because you want to keep that account open, that’s not going to happen. Most major creditors will cancel a credit card before they even receive official notice.
“Does a Chapter 7 wipe out all my debt”? Not necessarily. As the laws are currently interpreted in Texas, student loans almost always survive a bankruptcy. If your story makes me cry, we might consider attempting to wipe out student loans. Otherwise, it is a waste of your money to try. Some IRS debt survives the bankruptcy, and we can normally know whether it does or doesn’t before we even file the bankruptcy. Child support survives a bankruptcy. As does criminal restitution and some fraudulent activity. That’s not the entire list, but those are the most common.
“Can anybody file a Chapter 7 bankruptcy”? Anyone can file a chapter 7 bankruptcy, but if you do not qualify it will be dismissed. That’s normally a bad thing. Qualifying is based on an income and expense test way to complicated to explain here. There is also the issue of whether you should file a Chapter 7, even if you qualify. For example, if you are behind on your mortgage or car payments and want to keep them, a Chapter 7 might not be your best solution.
“How long will my credit be ruined”? As long as you let it be. If you follow my instructions on credit rebuilding after bankruptcy, your credit scores will dramatically improve within 12-18 months after the bankruptcy is filed and the bankruptcy will have virtually no effect on your credit scores 3 years after filing. Ignore my instructions and a bankruptcy can haunt your credit scores for years. I agree with Dave Ramsey that life is better when you’re debt-free. But, life is also better when you have nice credit scores, and you can’t do that without wisely using credit. As for credit availability, most new and used car dealers have financing available for people 90-100 days after the bankruptcy is filed. Not 0% interest, but not as bad as you might think. Multiple unsecured credit card providers will happily extend you credit about 120-150 days after the bankruptcy filing. The bankruptcy won’t matter for home financing about 2 years after the bankruptcy filing.
Thanks for reading;
*Note that I said “mostly everyone else you owe money”. Some creditors aren’t affected by a Chapter 7 bankruptcy. The most common is a landlord attempting to evict. If a landlord has an eviction judgment before a bankruptcy is filed, bankruptcy will not stop the eviction. Criminal proceedings (including “hot check” prosecutions”) are not stopped by a bankruptcy. And, some court proceedings or license restrictions regarding paternity, child support, divorce, and domestic violence aren’t stopped by bankruptcy. Foreclosures and repossessions are halted,but in many cases only temporarily. Most of the rest of the exceptions are rare in consumer bankruptcies, so we won’t go into them here.