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CHAPTER 7 BANKRUPTCY
Bankruptcy can be split into two main categories, liquidation (Chapter 7 Bankruptcy) and reorganization (Chapter 13 Bankruptcy). If you are facing debt and considering filing for bankruptcy, it may be confusing to know which of these bankruptcy chapters you should file in your particular case.
The more common of the two bankruptcy chapters is Chapter 7 is, sometimes called “straight bankruptcy”. Under a Chapter 7 bankruptcy, you can discharge your debts, and the trustee for the bankruptcy court will liquidate any assets that are not under Colorado state exemptions to repay some of your debts to your creditors.
WHAT IS CHAPTER 7 AND HOW CAN IT HELP ME?
Individuals normally file Chapter 7, although businesses can also file Chapter 7 if they are shutting down. The average bankruptcy process lasts from three to five months unless assets are being seized by the bankruptcy estate. The case may stay open for a longer period of time in those situations.
If you do want to keep the secured debt, you can reaffirm the debt by signing a reaffirmation agreement. A reaffirmation agreement keeps the secured debt from being discharged and allows the secured debt to stay on your credit report with the same terms of the loan that were agreed to prior to your filing of the bankruptcy. Upon being filed with and accepted by the court, the debt stays official and the property is safe from the creditor.
DEBTS THAT CAN BE DISCHARGED
Chapter 7 bankruptcy is a process that discharges, or eliminates, the vast majority of your debt. Most debts in a Chapter 7 are dischargeable. The most common debts that can be discharged in a Chapter 7 bankruptcy are:
- credit card debts
- medical bills
- other unsecured debts
In addition, secured debts, such as mortgages and car loans, can be discharged as well, but you may have to surrender the secured property if the creditor hasn’t already foreclosed or repossessed the property prior to your filing. Debts that are not dischargeable include:
- most student loans
- the majority of debt owed to the IRS
- child support and alimony
PASSING THE CHAPTER 7 MEANS TEST
Chapter 7 bankruptcy is not something you can automatically file. You must qualify for it from a financial standpoint, outside of certain circumstances. In order to qualify, your income must be at or below the median income for a similar household in your state. If you make more than the median income, you must take the means test. This test will help the court see if you have too much disposable income at the end of the month. The court views disposable income as money that you can pay to your creditors so they can receive something back. If you are above the median income and do not pass the means test, you will not qualify for Chapter 7 and will have to file a Chapter 13 if you seek bankruptcy relief (we discuss Chapter 13 more below).
Upon filing your Chapter 7 bankruptcy, the court will appoint a trustee to administer your case and represent the interests of the creditors. The trustee’s duties include:
- reviewing your paperwork,
- ensuring there are no assets to collect, or alternatively,
- seizing unexempt assets and selling them to recover money that they can then distribute to your creditors.
Most debtors in Chapter 7 have lower incomes and not many assets.
WHAT ASSETS DO YOU HAVE TO LIST UNDER CHAPTER 7?
If you file a Chapter 7 bankruptcy, you must list all of the assets you own. Assets normally include your:
- personal belongings
- bank accounts
- cash on hand
- other miscellaneous non-tangible assets like the receiving of an inheritance or a right to sue someone
You can use exemptions provided under Colorado law to protect your assets. If your exemptions do not cover the full value of your assets, you will have to either surrender the asset or pay the unexempt portion to the bankruptcy estate in what is referred to as a “Buy Back Agreement.” This does not affect the majority of debtors, as their exemptions are enough to protect all of their assets.
WHAT ARE THE BENEFITS OF FILING CHAPTER 7?
The benefits of filing a Chapter 7 are as follows:
- Chapter 7 is much quicker: A normal Chapter 7 case lasts three to five months. Upon completion of the case, you are free to get credit again and can rebuild your life as it relates to finances. A Chapter 13 is a much longer process, as it lasts three to five years.
- Chapter 7 is much more affordable: A Chapter 13 bankruptcy can be very costly. The attorney fees are significantly higher than in a Chapter 7. Court fees are also more expensive and you must make a monthly payment to the court over three to five years. While you have to pay money back to the bankruptcy estate in a Chapter 7 in some situations, your out-of-pocket expenses are going to be much lower overall in a Chapter 7.
- Chapter 7 is easier: Chapter 7 does not have as many moving parts as a Chapter 13. This makes the Chapter 7 process much easier to navigate.