Being in debt is no picnic. When you’re paying on credit cards, car loans, student loans or a mortgage those payments can add up to a serious drag on your cash flow. All that money that’s going to debt is money you can’t drop in your emergency fund or save for retirement.
When your debt load reaches the point where you’re struggling to keep up with the payments and the amount you owe is causing a panic attack, you might be wondering if it’s time to file bankruptcy. Filing Chapter 7 bankruptcy can be a solution when you’re financially overwhelmed but you don’t want to make a move without weighing the pros and cons.
Using Chapter 7 to dump your debt
When you file Chapter 7, you’re telling the bankruptcy court that you have no way to repay what you owe. You file a petition with the court that lists out all the debts you want to get rid of.
The court uses two different tests to decide whether you’re truly bankrupt. The first is the means test. Essentially, the court looks at your income and compares it to the median income for your household size in your state. If your income is less than the threshold for the number of people in your family, you pass the means test.
If your income is above the limit, you may still have another shot at filing Chapter 7 if you can show that you don’t have enough disposable income each month to pay your debts. Disposable income just means the income you have left over after you pay your basic living expenses, including housing costs, taxes and insurance.
Assuming you pass either the means test or you qualify for Chapter 7 based on your disposable income, the rest of the process is fairly easy. You’ll have to go to court and your creditors have the right to appear and challenge your filing. Assuming there are no blips on the radar, the court will discharge your petition and your debts along with it. Once your case is discharged, you’re no longer on the hook for any debts you included in your filing.
What debts can Chapter 7 bankruptcy eliminate?
Chapter 7 covers a pretty broad scope in terms of what you can include in your filing. Generally, you can file bankruptcy to discharge:
- Credit card debt
- Unsecured loans
- Medical bills
- Outstanding utility bills
- Collection accounts
- Certain kinds of court judgments
- Payday loans
- Car title loans
You can also include a car loan in Chapter 7 but there’s a catch. You have to surrender the car back to the lender. If you defaulted on a mortgage and you went through a foreclosure or short sale, you could also include any deficiency balance you owe. A deficiency balance happens when you owe more on the loan than what the bank is able to resell the home for.