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Filing for bankruptcy is never an easy choice.
But for many people, it can feel like the only way to escape the vice grip of debt and move on with their lives.
Before you can begin the filing process, you have to determine what kind of bankruptcy you qualify for and which is right for your financial future. The most common types of bankruptcy for individuals, Chapter 7 and Chapter 13, differ in how they manage your debt, according to the United States federal court system.
Those who choose Chapter 7 will likely be required to sell off their assets and use the money to repay as much debt as possible. The remaining debt will be forgiven in most cases.
Those who opt for Chapter 13 may also get a portion of their debt forgiven, but they won’t have to sell their property. Instead, they will have an opportunity to work with their creditors to get current on their payments and come up with a timeline to pay off their debt.
Do You Qualify for Chapter 7 Bankruptcy?
If Chapter 7 bankruptcy feels like your best option, the court system says you:
- Must pass a means test that calculates your current monthly income to make sure that after regular household expenses, such as rent or mortgage, you don’t make enough to repay at least 25% of your debt.
- Must complete a court-approved credit counseling course.
- Can’t have had another bankruptcy case dismissed within 180 days of your new case.
- Can’t have had debt forgiven in a previous Chapter 7 bankruptcy case in the past eight years or a Chapter 13 case in the past six years.
How to File Chapter 7 Bankruptcy
Before you can get on with the process, you’ll need to submit several documents to the bankruptcy court that serves your area.
First, you will have to submit a formal petition to the court that says you intend to file bankruptcy. The petition form and other paperwork can be found online.
Once you submit the petition, you will then need to fill out forms stating your assets and debt, your current income and expenses, a financial statement, and any contracts and leases you are still under.
If the debt you’re hoping to get discharged is primarily consumer debt, you’ll need to file even more paperwork, including:
- Proof that you took a credit counseling course.
- A copy of any debt repayment plan created through credit counseling.
- Pay stubs that prove your income in the 60 days before filing.
- A statement of monthly income along with any anticipated increase in income or expenses after filing.
You should also expect to pay fees. Courts will charge a $245 filing fee, a $75 administration fee and a $15 trust surcharge. (That adds up to $335.)
Generally, those fees will be due when you file, but in some cases, you can work out a plan to pay in four monthly installments. You’ll also want to factor in the cost of an attorney if you choose to hire one.
Is Chapter 7 Bankruptcy Right for You?
The major downside to Chapter 7 bankruptcy is obvious: You will have to give up many of your possessions. But the upside is great, too: You can get much of your debt discharged and be able to start fresh.
That means if you owe far more than your property is worth, Chapter 7 bankruptcy could make financial sense.
Still, while some of your property won’t be taken and sold to repay creditors, much of it will be. Chapter 7 bankruptcy might be better for renters who don’t stand to lose their homes or for others with few assets.
For one contributor to The Penny Hoarder who told her bankruptcy story under an assumed name, filing Chapter 7 wasn’t just a financial decision; it was an emotional one, too.
After filing bankruptcy when she was more than $100,000 in debt with a $28,000 salary, she battled feelings of guilt, shame and failure as she worked to get her finances back on track.
Take that into consideration when you’re making your own bankruptcy decision.
What to Expect After You File Chapter 7 Bankruptcy
Immediately after you file a petition for Chapter 7 bankruptcy, the majority of your creditors will have to put lawsuits, wage garnishments and even collection phone calls on hold, according to the court system.
This might bring temporary relief, but it won’t last forever.
While those cases are on hold, a court trustee will work with you and your creditors to schedule meetings where you will be required to answer questions about your financial history and your ability to repay your debt under oath.
In cases where Chapter 7 bankruptcy is approved, nearly all who file a petition see debt relief. The court system suggests speaking with an attorney before you file to make sure your kind of debt can be discharged under Chapter 7.
That’s because not all debt can be forgiven. In most cases, student loans, tax bills and any criminal restitution will still need to be repaid.
There is a possibility that creditors will come after you for payment even after your bankruptcy is approved. If that happens, it won’t be a surprise. Creditors must file petitions to say they want to continue to pursue payment.
Desiree Stennett (@desi_stennett) is a senior writer at The Penny Hoarder. She writes about how government and court actions impact your wallet.
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