Chapter 7 bankruptcy allows individuals to eliminate many types of unsecured debt and offers a fresh financial start. It involves selling certain assets to pay creditors. Understanding how it works helps you decide if it’s the right choice for your situation.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy, or “liquidation bankruptcy,” lets a trustee sell non-exempt assets to repay creditors. Afterward, the court discharges remaining eligible debts, so you no longer have to pay them. People often use this option to eliminate credit card debt, medical bills, and personal loans.
Who qualifies for Chapter 7 bankruptcy?
You must pass the “means test” to file for Chapter 7 bankruptcy. The test compares your income to the median income in Maryland. If your income falls below the median, you can file. If your income exceeds the median, you can still file, but you must prove you lack sufficient income to repay your debts. The test ensures only those in genuine need qualify for Chapter 7.
What assets can be liquidated?
In Chapter 7 bankruptcy, the trustee may sell some of your assets to pay creditors, such as a second car or valuable jewelry. However, you can keep many of your assets due to exemptions. Maryland’s exemptions include a homestead exemption for a certain amount of equity in your home, personal property exemptions, and retirement accounts like IRAs and 401(k)s.
What debts can be discharged?
Chapter 7 bankruptcy eliminates unsecured debts like credit card bills, medical bills, and personal loans. However, it doesn’t discharge certain debts such as child support, alimony, most student loans, and some tax debts. It’s important to know which debts will remain after your bankruptcy case.
How does Chapter 7 bankruptcy affect your credit?
Filing for Chapter 7 bankruptcy will hurt your credit score, and the bankruptcy can appear on your credit report for up to 10 years. Despite the setback, bankruptcy can also give you a chance to rebuild your credit. Many people improve their credit scores within a few years after their bankruptcy discharge by making timely payments and managing finances carefully.
Chapter 7 bankruptcy offers relief for those overwhelmed by unsecured debt. If you qualify, it can provide a fresh start. Understand what assets may be sold, which debts will be discharged, and how filing impacts your credit.
