The Facts About A Chapter 7 Bankruptcy

Chapter 7 bankruptcy is designed to eliminate debt. It is often referred to as a “straight” bankruptcy or a “liquidation” bankruptcy. It is known as such because the trustee assigned to the case can sell any nonexempt or unprotected assets and pay the money to your creditors.

However, it is important to understand that most property is protected by an exemption under state law. When an asset is exempt, a bankruptcy trustee cannot take the property. In a Chapter 7 Bankruptcy, the majority or all of your unsecured debts are discharged (which means that you are no longer liable for the balance owed to the creditor).

What Does The Chapter 7 Bankruptcy Process Look Like?

The purpose of filing a Chapter 7 bankruptcy is to discharge a debt or to cancel some debtor obligations (although it is important to understand that some debts cannot be discharged in a Chapter 7 bankruptcy). Once a Chapter 7 bankruptcy has been filed, the debtor will immediately be protected against attempts by the creditors to collect on the debts.

Here is basically how the process works:

1. After a debtor files a Chapter 7 Bankruptcy, a 341 hearing (otherwise known as a “Meeting of the Creditors”) is scheduled approximately 4-6 weeks later. In reality, it is quite rare for a creditor to appear at this hearing but this is the one chance that they have to do so once a bankruptcy proceeding is pending.

The format of these proceedings has recently changed and they are held via Zoom. I have found that this format change is much more convenient and less stressful and time consuming for the parties involved.

2. The court appearance via Zoom is conducted by a trustee assigned to your case. The “meeting of the creditors” is conducted by a trustee. The trustee is not a judge but is an official appointed by the court to oversee the meeting and to ask the debtor a series of questions.

3. The debtor’s attorney will also be present at this meeting, and the attorney will prepare the debtor with the questions that can be expected to be asked at this proceeding. This process usually only takes a few minutes.

4. Approximately 60 days after the court hearing, the Order of Discharge will be entered by the Court.

As your attorney, I will represent your interests. I will also offer personal attention to you and your case. As a sole practitioner, I offer flexible and accessible bankruptcy representation. Chapter 7 bankruptcy is the best way to move forward quickly. However, some people earn too much to qualify or they have a secured asset (such as a house or car) that they have fallen behind on in payments and they need extra time to catch up and become current.

Frequently Asked Questions About Chapter 7 Bankruptcy

There are many issues to ponder when considering whether to file for Chapter 7 bankruptcy. The following is a list of some of the most common questions clients ask when they meet with me for a consultation:

Who qualifies for Chapter 7 bankruptcy?

To qualify, you must meet specific requirements. The first step in determining eligibility is to determine whether you meet the income qualification guidelines. Your income must be below a certain amount to qualify to file a Chapter 7 bankruptcy. However, this is not as simple as looking up a figure on a chart. There are many factors to take into consideration:

• Number of household members
• Gross income for debtor (and if married, for spouse or for non-filing spouse)
• Taxes and other mandatory deductions from income
• Monthly payments on secured debts (house, car, etc.)
• Any extraordinary expenses necessary for the debtor and/or dependents

The calculation takes into account the average income received for the last 6 months. If this number is below the median income, then the debtor qualifies for Chapter 7 bankruptcy. If the number is slightly higher than the median income, then a further analysis (the means test) will be conducted to see if the debtor qualifies for a Chapter 7 bankruptcy. The means test determines a debtor(s) disposable monthly income after subtracting out the taxes and other mandatory deductions along with other allowable expenses.

How does filing for Chapter 7 bankruptcy affect my credit score?

It typically lowers your credit score, especially if you had a strong score beforehand. However, the extent of the impact can vary depending on your credit history. Examples include:

• Immediate drop in score after filing
• Chapter 7 stays on your credit report for 10 years, affecting loan and credit card eligibility
• Closed accounts are marked as discharged in bankruptcy
• Difficulty obtaining new credit or loans in the short term
• Higher interest rates if you qualify for financing soon after filing

Despite these effects, many see their scores begin to rebound within 12 to 24 months, especially if they

Can I keep my house and car if I file for Chapter 7 bankruptcy?

The easy answer to this question is “it depends”. Whether you can keep your house or car in Chapter 7 depends on your equity in those assets and your ability to stay current on loan payments. In Iowa, you are allowed to claim exemptions that protect certain property from being sold by the bankruptcy trustee. These include:

• Up to $7,000 in equity in your car (per person, if filing jointly)
• An unlimited homestead exemption for your primary residence (as long as you have lived in the residence for a requisite amount of time), provided it does not exceed one-half acre in town or 40 acres in the country.

If your property’s equity falls within the exemption limits, you can likely keep it. However, if you are behind on mortgage or car payments, the lender still has the right to repossess or foreclose, even if the bankruptcy wipes out your liability on the debt.

Are there any exceptions to the Chapter 7 means test?

Yes. Some individuals are exempt from the means test altogether:

• Disabled veterans who incurred debt while on active duty
• National Guard or Reserve members called to active duty for at least 90 days
• Individuals whose debts are primarily business-related
• Individuals with income below the state median for their household size

These exceptions are limited and based on specific criteria. If you think you may qualify, speak with a Iowa bankruptcy attorney to evaluate your financial situation and help confirm your eligibility.

What if my income fluctuates significantly from one month to the next? How is that handled in the means test?

If your income varies, the means test considers your average income over the past six months rather than just the current month. This approach helps account for fluctuations by smoothing high- and low-income periods into a single figure, but accurate records are critical. If your income has recently dropped, such as due to job loss or reduced hours, you can explain these changes to the court.

In some cases, your attorney may be able to present evidence that the average does not reflect your current ability to pay, which could influence the outcome of your case.

Get Your Questions Answered

I want to ensure that you get all of your bankruptcy questions answered. This is part of the reason I offer an initial consultation at no charge. It is your opportunity to ask questions, get to meet me and gain a stronger understanding of the process. Call 712-847-5882 or send me a brief email summary of your situation, and I will get in touch with you.

I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code.