Handling Chapter 7 Bankruptcy Debt

Chapter 7 is the “nuclear option” of bankruptcy—essentially, you sell pretty much everything you’ve got and turn out your pockets, then pay the proceeds to your creditors in exchange for being released from your debts. Since the assets you could be forced to sell or turn over include your house or other real estate, much of your personal property, and pretty much everything in the bank, you’re left with not much—other than a second chance.

Determining Chapter 7 Bankruptcy Use

You may not qualify for one of the reorganization-style bankruptcies. For example, Chapter 13 has a debt limit—owe too much and you can’t use it. On the other hand, there is no Chapter 7 bankruptcy debt limit; if you convinced someone to loan you the entire GNP of Monaco, you could theoretically discharge the whole amount.

Chapter 7 Bankruptcy Debt Filing Requirement

There may be no debt limits, but there is an income limit: if the debtor’s average monthly income (excepting certain expenses) is more than the lesser of $10,950 ($131,400 per year) or 25% of the unsecured debt, Chapter 7 may be unavailable. The court may conclude that it’s “abusive” to let someone earning that much use Chapter 7 and may instead require a Chapter 13 bankruptcy (though watch out for the debt limit!), where creditors are paid off over time. This effectively discriminates against people in high-income, high-cost-of-living states.

Also, there’s a requirement that the would-be bankrupt debtor go through chapter 7 credit counseling prior to filing.

Discharging Debt in Chapter 7 Bankruptcy

Chapter 7 will let you clear, or discharge, most of debts—but not all, also known as ch 7 dischargable debt. There are some debts a debtor is not allowed to discharge. Chapter 7 nondischargeable debts include: alimony and child support; many debts owed to the government; debts for injuries caused while DUI; debts for willful or malicious (i.e. done deliberately, with a “mean” intent) damage to other persons or property; fines or restitution owed from criminal acts; and some debts arising from fraudulent acts, if the creditor properly objected to discharge.

Also, Chapter 7 doesn’t necessarily protect the debtor from secured debts, such as many car loans or mortgages. The lien or other security interest is not wiped out by the bankruptcy—the whole point, after all, of the security interest is to ensure at least partial payment in the event the debtor otherwise can’t pay. If the secured creditor did not receive enough, they can move to seize the property unless the debtor “reaffirms” the debt—promises in writing to keep paying it.

Chapter 7 Bankruptcy Debt Legal Help

Bankruptcy is very complex—that’s why, for example, there are separate bankruptcy courts. Deciding which type of bankruptcy is most appropriate, ensuring that all requirements are complied with, and dealing with any challenges from creditors is not something a lay person should try to do for him- or herself. The stakes are high: get bankruptcy wrong, and you’re still liable for all your debts. Make sure you contact an experienced Chapter 7 bankruptcy debt lawyer to ensure you can get your debts discharged.

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