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How does Chapter 7 bankruptcy work?
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How does Chapter 7 bankruptcy work?

On Behalf of | May 22, 2020 | Bankruptcy

If you’re dealing with mounting debt, you may worry you will find yourself unable to pay it all off. As noble as repayment is, certain scenarios make it impossible. When bills and expenses crush you, filing Chapter 7 bankruptcy may provide you the financial relief you need.

What Chapter 7 bankruptcy discharges

Unlike Chapter 13 bankruptcy, where you repay creditors on a plan, Chapter 7 discharges most of your unsecured debts. These debts include:

  • Medical bills
  • Utility bills
  • Credit card balances
  • Loans from family and friends

When filing Chapter 7 bankruptcy, you will not have to pay off secured debts. A bankruptcy court trustee will instead sell these off during your proceedings, and you will no longer own them. Certain debts are also ineligible for discharge during bankruptcy. These debts include alimony, child support and student loans.

What Chapter 7 allows you to keep

Filing Chapter 7 bankruptcy does not mean you will give up every last piece of your property. You may be able to keep your home if you’ve stayed current on mortgage payments and have little equity in it. You will also get to keep any vehicle you own which you have less than $4,000 of equity in. And you will likely retain most of your household goods, clothes and furnishings, too.

Passing the means test

To file Chapter 7 bankruptcy, you must pass a means test. To do so, your income must fall below Pennsylvania’s median for your family’s size. You will have to prove it remained below this amount for the past six months. Your expenses will also factor into the means test, too. You may have disposable income available after meeting all your basic expenses. In this case, you will likely have to file Chapter 13 bankruptcy and use it toward repaying creditors. But if your income does not cover your expenses, you will likely remain eligible for Chapter 7.

Filing Chapter 7 bankruptcy may cause you short-term pain. But it can give you a fresh financial start and protect you from paying off insurmountable debt. An attorney with bankruptcy experience can guide you through the process.