Chapter 7 Bankruptcy Guide: Updated for 2023

A Chapter 7 Bankruptcy Petition allows a debtor to "discharge," or eliminate, most – if not all – of their unsecured debts. A bankruptcy reduces balances to zero for certain debts owed, like credit cards, unsecured personal loans, and back utility bills. You may have heard this described as a "fresh start," and in many cases, it could be precisely that. Filing for a Petition for Bankruptcy is a complex process, and you'll want a skilled attorney at the helm to assist you. Fortunately, the Law Offices of William P. Harrington, Jr., Esq. are here to help.

Before you begin, there are crucial factors to keep in mind. The most important of these is the potential that you will lose some of your property as the Bankruptcy Trustee seizes certain assets, liquidates them, and uses the proceeds to pay back your creditors. The extent to which the Bankruptcy Trustee can seize assets is determined by which assets are considered exempt.

Knowing how to make every exemption penny available to protect your assets from being used to pay your creditors is inarguably vital. Having a skilled attorney on your side can make all the difference.

Let’s say, for example, you own a car and would like to keep this asset while filing for Chapter 7 Bankruptcy. As of October 2021, the automobile exemption under the Federal exemption scheme is $4,000. Let’s assume the car is worth $10,000 and has an $8,000 loan, so you have $2,000 in equity. In this case, you would be able to keep your vehicle through a reaffirmation agreement with your automobile lender.

However, let’s say that you’ve paid the car off, but it’s still worth $10,000. Unless you can piece together exemptions from elsewhere within the Bankruptcy Code to cover the extra equity (for example, the “Wildcard” exemption or an unused portion of the Homestead exemption), the Trustee may sell your car, give you $4,000, and distribute $6,000 to your creditors.

The same idea applies to debtors who own a home. As of October 2021, the Federal Homestead exemption for a single-filer is $25,150, and a married couple filing jointly is $50,300. So, if the value of your home, minus your mortgage, is less than this amount, you’ll be able to keep your home while filing for Chapter 7 Bankruptcy.

The other critical component is whether you’d be eligible to file for Chapter 7 at all. If a petitioner’s income is less than the state’s median income for a household of a given size, they are eligible to file for Chapter 7 per the Bankruptcy Code. But, if the petitioner earns more than the state's median income, the Code then requires that a complicated calculation, known as a “Means Test,” must be completed to determine continued Chapter 7 eligibility.

For reference, the median family income in Pennsylvania for a family of 3 as of October 2021 is $88,293. So, if a Pennsylvania filer is in a 3-person household and earns an income of $90,000, the Means Test calculation will be required, and they may be ineligible for Chapter 7.

Once we have determined eligibility for Chapter 7 and have ensured that all assets are exempt, our next step is to draft the Petition. Drafting the Petition considers all financial history and is an incredibly involved process where attention to detail is a must. The Petition must include all creditors to whom you owe money or risk that particular debt not being cleared. You must disclose every source of income and every asset you have – right down to your kitchenware – and provide a good-faith value for each item. Failure to be completely transparent can jeopardize your entire case.

Yes, drafting the Petition is an arduous process. Fortunately, an attorney can assume some of these responsibilities to ease the burden. If you are considering Bankruptcy, having the advice of an experienced attorney can bring you peace of mind.

Here's some good news: The law requires collection activity to stop immediately after filing the Petition, including lawsuits, creditor calls, and creditor letters. This stoppage is called the Automatic Stay, which prevents creditors from making further attempts at separating you from your money.

After the Rule 341 meeting has concluded, we are in the "home stretch," and it's usually only a matter of time before the Order of Discharge is entered. The debtors must complete a "Debtor Education Course," with proof of attendance filed with the Court afterward, but this is a relatively simple item. The only way to goof this up is to not complete the course.

Once the Court enters the discharge order, your dischargeable debt will be erased, and the case will be closed. The important note here is that not all debt is dischargeable. For example, payment for back taxes and student loans will need to continue. The same is true for a mortgage or a car loan that you’ve agreed to keep paying in exchange for keeping your house or your car. An experienced attorney will review your debts with you and tell you which obligations will survive the Bankruptcy process and which are dischargeable.

Chapter 7 Bankruptcy is a serious matter and not one to be taken lightly. That said, it can be a lifeline to struggling families if all else has failed. If you or someone you know is financially struggling and needs to speak to an attorney about their options, please don’t hesitate to call me.