Understanding Chapter 7 Bankruptcy
Chapter 7 bankruptcy discharges, or “forgives,” your unsecured debt. The most common type of bankruptcy among individuals, Chapter 7 takes an average four to six months to complete. The American Bankruptcy Institute reported that of the nearly 775,000 bankruptcies filed in 2019, 63% were Chapter 7 and 94.3% of those had their debts discharged.
There are many signs that could indicate it’s time to file for debt relief:
- You’ve depleted your savings
- You have little or no disposable income
- You’re using loans to pay your bills
- You make a credit card payment then immediately max it out again
- You’ve fallen behind on mortgage or rent
- Creditors are calling about late or missed payments
- Your debts are more than one-half of your annual income
- Paying off your debt would take more than five years, even with extreme measures
- The financial stress is taking a toll on your health, relationships, and ability to sleep
What Chapter 7 Bankruptcy Does
Chapter 7 Bankruptcy will discharge unsecured debt, including but not limited to credit cards, personal loans, and medical bills. It can also discharge balances due on your auto loans and mortgage, although you will have to surrender your vehicles and real property to do so.
What Chapter 7 Bankruptcy Doesn’t Do
Chapter 7 will not relieve debt from obligations such as alimony and child support, student loans, back taxes, court fees and penalties, homeowner association fees, and judgments against you for certain personal injury claims. It also won’t take care of any unsecured debt you didn’t have discharged in your bankruptcy case.
How to Qualify for Chapter 7 Bankruptcy
If your median income is below the Arkansas average, if your debts are not primarily consumer debts, or if you’re a disabled veteran who incurred most of your debt while on active or other duty, you can file for Chapter 7 bankruptcy. If not, then you are required to pass a “means test” to see if you qualify.
A means test is a calculation of your income, debts, and assets. To calculate your “current monthly income” add up all of your income for the past 6 months and then divide it by six. If your monthly family income is less than the median income in Arkansas, then you may qualify for Chapter 7. If it exceeds the median, then you would move on to the second part of the means test which assesses your monthly expenses and compares it to your monthly income. Depending on how much disposable income it determines you have on a monthly basis, you may qualify for Chapter 7 bankruptcy.
How Legal Counsel Can Help
Filing for Chapter 7 bankruptcy is complicated, so hiring an experienced bankruptcy attorney is the best investment you can make to right your financial situation. A knowledgeable attorney is also going to provide you with advice and input throughout the process. For example, just because you qualify to file for Chapter 7, it may not be in your best interest, especially if you’re trying to hang onto your home or other assets. It’s difficult to make those decisions without legal expertise.