Jeena Cho is a San Francisco bankruptcy attorney who has helped hundreds of individuals and small businesses decide if bankruptcy was appropriate for them. She is the Vice Chair of the Commercial Law and Bankruptcy section of The Bar Association of San Francisco.
Overview of Chapter 7 bankruptcy
A lot of people have asked, “What is Chapter 7 bankruptcy?” Chapter 7 refers to a type of bankruptcy, commonly known as “liquidation” bankruptcy where all of your debts will be discharged (with certain exceptions) and any unexempt assets will be sold by the Chapter 7 Trustee for the benefit of your creditors. The other main type of bankruptcy is Chapter 13 bankruptcy, which I’ll address in a future post. (Learn more about the difference between the two in this article: Basics of Bankruptcy)
Who should file for Chapter 7 bankruptcy?
Filing for bankruptcy is not something to be taken lightly. It can be the exact right thing or the exact wrong thing, depending on the specific details of your situation. To give you a better idea of the kind of analysis that a bankruptcy attorney usually does, I am going to describe two of the most important questions we ask when doing an analysis for a client.
1. How much disposable income do you have?
This is known as the income and expense analysis, and it involves looking at your average monthly income and your average monthly expenses (in other words, your budget). Calculating the difference between these two numbers gives you your monthly disposable income. That number will go a long way toward determining whether bankruptcy is right or wrong for you. Questions you should ask yourself at this stage of the analysis are: how much more money can I save each month? Are there ways I could increase my disposable income?
Once you know about how much disposable income you’ll have each month, you then need to determine the time it will take you to pay off your debts using that disposable income. If your total amount of debt is so great that there is no way you could pay off your debt within a reasonable amount of time, then bankruptcy may be the right choice for you.
Of course, the question is, what is a “reasonable” time? The answer to that varies depending on the individual situation and the type of debt you have. For example, for a mortgage, it’s reasonable to repay it over 30 years. However, on a credit card, 30 years may not be reasonable. I will often suggest Chapter 7 bankruptcy to someone whose repayment timeline for credit card debt is 5 years. But again, that is an individual calculation that will be different for each person.
Another way to look at this calculation is to examine whether your total debt is more than 50% of your gross income. So, for example, if you earn $80,000 per year and are $60,000 in debt, you’d be well above the 50% mark. However, as with all of these calculations, it’s important to remember that each situation is different.
This brings us to the second question in our analysis:
2. What are your assets worth?
The second analysis we do is to look at the liquidation value of your assets. In a Chapter 7 bankruptcy, any unexempt assets will be taken by the Chapter 7 trustee and liquidated. Meaning, the trustee will try to sell it. However, this doesn’t mean all of your belongings will be taken. The process is designed to leave the individual in a position where they can move forward.
The amount of assets that you’ll be able to keep depends in part on the state in which you live. Each state has very different rules on this. When a bankruptcy attorney does an individual analysis, they look at all of the person’s assets and instruct them which ones they would be able to keep.
Now that you understand the process of Chapter 7 bankruptcy a little better, you may be wondering…
Will Chapter 7 bankruptcy hurt my credit?
The answer to this question is “Yes.” In general, Chapter 7 will hurt your credit score. Chapter 7 bankruptcy will be reported on your credit report for up to 10 years. This does not mean you’ll wear a Scarlet letter around your neck for 10 years or have to live without credit, but it does mean you’d have to adjust to some constraints on your ability to borrow money. It can take 5 years or more before you can qualify for secured loans such as mortgages or car loans.
How long does Chapter 7 bankruptcy process take?
In general, the process usually takes about 3-4 months. You are required to complete government-approved credit counseling before filing the case. The credit counseling session is a short online class that takes anywhere from 40 minutes to 1 hour. After filing, you are required to complete another class called Financial Management Course (also done online).
After your case has been filed, there will be an “Automatic Stay” which forbids your creditors from making any attempts to collect on your debt while the bankruptcy process takes place. Then, 30-45 days later, you will need to attend a Meeting of Creditors, which will take about 10 minutes. This meeting is with the bankruptcy Trustee and generally, held in a large conference room. If no objections are raised, 60 days after that your Order of Discharge will be entered, which means your debts will be forgiven. It’s important to remember that certain debts, including child support, recent taxes, and student loans will remain.
Hopefully this post has given you a better idea of how to answer the question, “What is Chapter 7 bankruptcy?” There are further details that I hope to address in future blog posts, however, the information above should give you a clear picture of the Chapter 7 bankruptcy process. If you are considering bankruptcy, you should find a bankruptcy attorney to consult with. A good bankruptcy attorney will ask you the questions mentioned above.
Image by Jerry Bunkers