Finance Bankruptcy

Which Bankruptcy Chapter Eliminates Your Debts?

Published at 03/09/2012 07:46:09


If you file bankruptcy chapter 7, you may be able to eliminate most or all of your debt. You may choose chapter 7 if you do not own many assets. This chapter also requires you to have more debt than cash. In other words, you must owe more than you can financially afford to pay. Filing bankruptcy should not be taken lightly. The federal government has stringent criteria in place for anyone seeking debt relief. You must do several important things before the court approves your case. Only after the bankruptcy judge and your trustee examine your case will you be able to eliminate your responsibilities.


Eliminated Debt

You should list every creditor that you owe when you complete your bankruptcy chapter 7 forms. You can typically eliminate your unsecured debt. This type of debt does not have liens or other legal holdings against it. The debt includes unsecured credit cards, utility bills and rental agreements. You can also eliminate medical debt such as hospital bills. Personal loans that did not require liens on your home or other assets may be included.

Secured debt includes car loans and home mortgages. They can be eliminated in bankruptcy chapter 7 if you do not plan to keep them. If you wish to keep your secured debt, you may do so. However, you must keep up the payments to avoid defaulting on your obligations.

Debt Not Eliminated

Although bankruptcy chapter 7 gets rid of most debt, it does not eliminate certain responsibilities. You cannot dismiss child support, alimony and other debt considered priorities by the government or bankruptcy court. If you owe on your federal or state taxes, you cannot add them to your petition. In some cases, you may be able to eliminate school loan debt if the court sees that you cannot pay. This is very difficult to prove.



Chapter 7 Requirements

Before you petition for bankruptcy chapter 7 relief, you must complete a credit-counseling class. The class will decide if you qualify for debt relief, or if you need to pay your debt. Once you successfully complete the class, you receive a certificate that states you meet the bankruptcy filing eligibility requirements. You must take the class 60 days prior to filing.

You also need to pass a financial or means test before you complete your filing. The test requires you to list all of your income. If your income is below a certain level, you qualify for bankruptcy. If you income is higher than the test criteria, you may need to file chapter 11. Keep in mind that although you pass the means test, the bankruptcy court can still deny you chapter 7 relief.


Tips and comments

Avoid potential problems after the court discharges your bankruptcy chapter 7 by making better spending choices. Soon after your discharge, new creditors will offer you chances to rebuild your credit. You may try to avoid getting new credit until you are financially stable. You can only file bankruptcy every eight years. Chapter 7 typically stays on your credit report for up to 10 years before dropping off.