What’s a Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is legal protection from your creditors.  It’s for individual consumers and is also known as “liquidation”, because the debtor has to sell assets to pay off debts.  The assets not exempt from bankruptcy are luxury items, household items, real estate, cars and boats. The debts not discharged are child-support and alimony back payments, criminal fees, federal taxes, government student loans, and mortgage liens.  Any loans that have a cosigner may be liable for the debt.

Qualification for Chapter 7 is based on income, which must be less than your state’s median income.  It is calculated by a “means test” using income and expenses and is fairly complicated.  Usually a person selects chapter 7, because they don’t have any assets to lose or has little property except the basics such as furniture and clothing. They have very little or no money remaining after paying for the basic expenses.  The main reasons people file for chapter 7 bankruptcy are unemployment, large medical expenses, overextended credit, marital problems, and large unexpected expenses.

Chapter 7 bankruptcy remains on your credit reports for 10 years from the date of filing and impacts your ability to get credit, insurance, apartment rental, and employment.  Bankruptcy is considered the worst thing you can do to your credit and shows that you have handled credit poorly in the past.  With Chapter 7, it is somewhat easier to re-establish credit, since you have no credit obligations but you may be required to have secured lines of credit.

Bankruptcy isn’t always the worst option but it should usually be your last option.  It impacts your ability to obtain credit, which means you are limited to paying in cash possibly for years while you rebuild your credit.  This is not always a bad way to learn to live, since credit can and did get you into financial trouble.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Bankruptcy, Credit Cards, Debt, Financial, Money & Identity

This post was written by John Ulzheimer