Definition
Chapter 7 bankruptcy, also known as 'liquidation bankruptcy' or 'straight bankruptcy,' is a legal process that allows individuals to eliminate most unsecured debts by liquidating non-exempt assets to pay creditors. It's the most common form of bankruptcy for individuals who have limited income and cannot repay their debts. The process typically takes 3-6 months from filing to discharge. To qualify, debtors must pass a 'means test' demonstrating that their income is below their state's median income or that they don't have enough disposable income to repay their debts through a Chapter 13 plan. While Chapter 7 can provide a fresh start, it also has serious consequences, including potential loss of non-exempt property and a significant impact on credit for up to 10 years.
Frequently Asked Questions
What property can I keep in Chapter 7 bankruptcy?
In Chapter 7 bankruptcy, you can keep 'exempt' property, which varies by state. Common exemptions include: some home equity (homestead exemption), vehicles up to a certain value, necessary household goods and clothing, tools needed for your job, qualified retirement accounts, and certain personal items. Non-exempt assets (like second homes, valuable collectibles, or non-essential luxury items) may be sold by the trustee to pay creditors. Some states allow you to choose between state and federal exemptions.
How does the means test work for Chapter 7 qualification?
The means test determines eligibility for Chapter 7 by comparing your income to your state's median income for a similar household size. If your income is below the median, you automatically qualify. If it's above, you must complete a detailed analysis of your income and allowable expenses to determine if you have enough disposable income to fund a Chapter 13 repayment plan. If the calculation shows you have little to no disposable income left after necessary expenses, you may still qualify for Chapter 7.
What happens to my co-signers if I file Chapter 7?
When you file Chapter 7 bankruptcy, the automatic stay doesn't protect co-signers or guarantors on your debts. While your personal liability for co-signed debts may be discharged in bankruptcy, creditors can still pursue your co-signers for the full amount. If you want to protect co-signers, you might consider reaffirming the debt (agreeing to remain personally liable) or filing under Chapter 13, which offers a co-debtor stay that protects co-signers during the bankruptcy process.
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