Chapter 7 is a form of bankruptcy that allows debtors to have debts discharged through liquidation of non-exempt assets. In order to qualify for this debt-relief solution, petitioners must meet criteria established under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Filing Chapter 7 can be advantageous to petitioners that qualify, but also presents with serious ramifications. The first step of filing bankruptcy involves hiring a lawyer. Finding lawyers is not as easy as it used to be because BAPCPA established regulations that hold attorneys responsible for reported information.
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Today, bankruptcy attorneys are required to file a letter of certification stating reported income and expenses are factual and petitioners demonstrate a true need for filing. Validating reported information requires additional time which equates to higher legal fees.
Debtors undergo a process known as the 'means' test to determine if they qualify for Chapter 7. This test compares debtors' income to state median income levels. Petitioners who earn more than state levels are normally required to file Chapter 13. This chapter requires debtors to establish a payment plan that can extend up to 5 years.
All bankruptcy petitioners are required to undergo credit counseling before their petition is approved by the court. Counseling must take place with an agency approved by the U.S. Trustee. Debtors are responsible for the costs of credit counseling.
While debtors often balk at the credit counseling requirement they should take advantage of the opportunity to improve money management skills. In some instances, counselors can help debtors develop payment plans and avoid the expense and embarrassment of filing bankruptcy.
Under Chapter 7, debtors surrender non-exempt property to the bankruptcy Trustee. An estate is established to hold property and pay creditor debts. The estate becomes legal owner of assets until property is returned to creditors or liquidated through public sale. Acquired funds are distributed to creditors who have filed a claim. Once remaining debts are discharged ownership rights of remaining property reverts back to the debtor.
The average duration of Chapter 7 bankruptcy process is 3 to 4 months. However, the financial ramifications can linger for up to 10 years. Bankruptcy is reported to the major credit bureaus. Debtors often witness a decline of 100 points or more from FICO scores.
When FICO scores decline, debtors fall into a different credit category. Should they require financing of any sort they will pay substantially higher interest rates. Few lenders grant loan requests to applicants who have recently filed bankruptcy; making it difficult for debtors to buy a house, finance a car, or qualify for educational loans.
Debtors must engage in credit repair strategies and strive to improve credit scores as quickly as possible. It can take a year or two to raise FICO scores by 100 points. One of the best strategies is to spend less than is earned and pay bills on time and in full.
Debtors should avoid taking on new debt for at least two years after bankruptcy. They should strive to keep debt-to-income ratios below 30-percent. For example, if debtors have a credit card limit of $2,000, open balances should not exceed $600.
BAPCPA prohibits debtors from filing Chapter 7 for at least 8 years after debts are discharged. Therefore, it is imperative to take control of personal finances and engage in positive money management practices.
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