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Chapter 7

culverWhen the average person thinks of bankruptcy they are usually thinking of Chapter 7, which includes personal bankruptcy. Under Chapter 7, most of the debtor’s unsecured debt is discharged (i.e., cancelled). You may however, be forced to sell some of your assets.

Determining eligibility

Abuse of bankruptcy law was a problem in the past, so the law was changed in October 2005 to include a means test which is used to determine if you are eligible to have the court discharge your debt. Here are the criteria:

  1. Your ability to pay your debts is determined using a formula which takes necessary expenses like rent and food into account.
  2. The court will also take your state’s median income into account.

If you earn more than your state’s median income, and you have 25% or more left over after necessary expenses, you will be deemed ineligible for Chapter 7, though you will still be able to file for Chapter 13.
You may still file for Chapter 7 bankruptcy if you fail the means test, but you will have to convince a judge that your bankruptcy is legitimate.

When you file for Chapter 7 bankruptcy, the court issues an automatic stay, which protects you from debt collectors, at least in the short run. During the bankruptcy processing period, your property may not be repossessed, your electricity may not cut off, nor may you be evicted from your home or apartment. Note however, that any rent debt incurred after filing may make be grounds for later eviction.

  1. Stops your creditors from taking collection actions against you and discharges most unsecured debt like personal loans, medical bills and credit cards. Filing for bankruptcy prohibits debt collectors from calling you. Failure to do so makes it possible for you to sue them for each call they make to you after you file. Click here to see a list of debts that are not dischargeable.
  2. Prevents foreclosure and other efforts to repossess your belongings.
  3. Allows the filer to start with a clean slate and build a new credit history. An attorney can give you insights on how to rebuild your credit so that you may qualify for an FHA mortgage as few as two years after filing
  4. Chapter 7 may discharge income tax debts if the income tax returns were filed more than three years ago. For those taxes which are fewer than three years old, bankruptcy may remove the interest and penalties.

You may not file for Chapter 7 bankruptcy if you have already had your debt discharged under Chapter 7 (or any other kind of bankruptcy) within the last 6 to 8 years (depending on which type it was).