If you’re reading this because you’re in so much debt you can barely breathe under the pressure, take a moment to hear this: It’s going to be okay. It may not seem like it right now, and it may not be easy—but it is going to be okay.
Filing for Chapter 7 bankruptcy is serious. So, if you’re considering it—either because you’ve been hit so hard financially by the effects of the pandemic or for any other reason—keep reading to learn the details and your options.
Types of Bankruptcy
Bankruptcy is bankruptcy, right? Well, actually there are six different kinds. The two most common types of bankruptcies for individuals are Chapter 7 and Chapter 13, so let’s start by breaking these down.
What Is Chapter 7 Bankruptcy?
Chapter 7 is a type of bankruptcy that wipes out most or all of your debt by forcing you to sell your assets (anything you own that has value) to pay back your creditors (the people you owe money to). This process is called liquidation—and once it’s over, any remaining unsecured debt (money you borrowed that isn’t tied to an actual item, like credit cards and medical bills) is usually erased.
Get help with your money questions. Talk to a Financial Coach today!
But keep in mind, there are some types of debt that aren’t forgiven through Chapter 7 bankruptcy—like child support, alimony, student loans, some tax debt, HOA fees, court fees and any unsecured debt you left off your paperwork on purpose. (P.S. That last one’s called fraud.)
Depending on where you live, there are some things the court might not force you to sell during the liquidation process of a Chapter 7 bankruptcy. You can usually keep basic necessities (think your house, car and retirement accounts). But please note, a Chapter 7 bankruptcy won’t stop a foreclosure on your home—it can only postpone it.
If you want to keep any of the stuff you still owe money on, you can reaffirm the debt—meaning you recommit to the loan agreement and continue making payments. That also means you still have debt to make payments on. But most Chapter 7 bankruptcies are no-asset cases without enough valuable things and property to sell.
Chapter 7 vs. Chapter 13
So, while Chapter 7 bankruptcy usually forgives most of your debt, Chapter 13 bankruptcy basically reorganizes it. You’ll get a court-approved monthly payment plan to pay back some of your unsecured debt and all of your secured debt over three to five years. The monthly payment amounts are based on your income and how much debt you have. Also, the court gets to put you on a tight budget and keep a close eye on all your spending. (There’s no privacy in bankruptcy.)
Unlike Chapter 7, Chapter 13 lets you keep your stuff and catch up on any debt that doesn’t qualify for bankruptcy. Also, Chapter 13 can stop a foreclosure and give you time to catch up on your mortgage.
Another key difference between Chapter 7 and Chapter 13 is how you qualify. With Chapter 7, your disposable income (that’s how much money you have left after you subtract all your necessary expenses, like rent and groceries) must be low enough to pass the Chapter 7 means test (more about that in a second). If it’s not, you’ll be put into a Chapter 13 bankruptcy. Let’s take a closer look at how all that works.
Who Qualifies for Chapter 7 Bankruptcy?
There are a few requirements to file for Chapter 7 bankruptcy. For one, the court will need to decide that you don’t make enough money to pay back your debt. How do they come to this conclusion? By using something called the means test, which compares your income to the state average to see if you have the disposable income (aka the means) to pay back a decent chunk of what you owe. If they decide your income is too low, then you might qualify for Chapter 7.
But there are more requirements as well, which can include:
- You need to take an approved credit counseling course.
- You can’t have applied for a Chapter 7 bankruptcy in the past eight years.
- You can’t have applied for a Chapter 13 bankruptcy in the past six years.
- You have to wait 181 days to file if you tried to apply for a Chapter 13 or Chapter 7 bankruptcy before, but the case was dismissed.
- You can’t try to defraud your creditors by taking on debt while planning to file for bankruptcy (which is real sleazy).
We said it before, and we’ll say it again: Bankruptcy is serious. It’s not a quick fix. It’s not easy. It’s a long, painful process, and you might go through all the trouble of filing and still be denied. Not to mention, if you are approved, a Chapter 7 bankruptcy will haunt your credit report for 10 years!
Still, if you’re deep in debt, bankruptcy might feel like your only option. But it isn’t! You need to try everything in your power to avoid it. Here are a few ways to get started.
Get on a budget.
The first thing you should do before considering bankruptcy is get yourself on a bare-bones budget. Write down your total income, and then subtract the most essential expenses, which we call the Four Walls: food, utilities, shelter and transportation. In other words, you feed your family, keep the lights on, pay the rent or mortgage, and put enough gas in the car to get to the very few places you need to go (like work and the grocery store). Use all the rest of your income to fight the good fight of paying off your creditors.
Increase your income.
Your next step in this war on debt is to increase the chunk of money you’re throwing at your debt. How? By increasing your income. How? By taking on more hours or an extra job or side hustle. Or three. Yes, really! Remember, this isn’t field day. It’s a battlefield.
Sell your stuff.
Then you sell your stuff. Listen, if you don’t sell your things now, you’ll either be forced to sell them in a bankruptcy or you’ll have to reaffirm the debt to keep them. So, get rid of your stuff so you can get rid of your debt.
Get help from a financial coach.
You can also get money advice from a trained financial coach. Not from your neighbor. Not from your parent. From a highly trained coach. They’ll talk with you about alternatives to bankruptcy and create a plan based on your personal situation. A financial coach will give you encouragement and remind you of what we said earlier: It really will be okay. It might be hard, but it will be okay.
Filing for Chapter 7 Bankruptcy
If you’ve given all you’ve got to those alternatives and you’re still drowning in debt, know this: You aren’t a bad person if you have to file for bankruptcy. Good people get in tough situations. And you’ll get through this.
Here’s how to file for Chapter 7 bankruptcy:
- Gather and organize your documents. You’ll probably need a list of your debts, income and assets.
- Take an approved credit counseling course.
- Fill out all the bankruptcy forms.
- Make sure you have your $335 filing fee.1
- Print your bankruptcy forms.
- File your bankruptcy forms at your local courthouse.
- Send in any documents requested by your court-appointed bankruptcy trustee.
- Meet with your trustee (in a meeting of the creditors).
- Complete the debtor education course.
- Finish the bankruptcy process.
Life After Bankruptcy
If you have to file for bankruptcy, know this: There is life after. And if you don’t end up filing but you have to scrape and claw to avoid it, you can become stronger from it. Don’t let either struggle be the end. Make it a new beginning. Don’t let this shape you into a victim. Be a victor.
And you can. You can move from the space of fear and doubt about the future (and maybe even your own abilities) into a place of hope. You. Really. Can.
When you’re drowning in debt, it’s hard to believe that, but let us tell you again and again—it’s true! And right now, we’re throwing you a life preserver: a Ramsey+ free trial. This plan has helped nearly 6 million people take control of their money and find hope. You’re still the one who has to swim, but with the resources inside this solution, you’ll know how.
And if you need some one-on-one help, talk to a financial coach. They understand the struggle you’re going through—and how you can turn the tide quickly. It’s just one call, but it makes all the difference.
So, don’t give up. Don’t lose hope. And don’t wait. You’ve been wanting to get to a better place for so long. This is where it starts. Go on. Make just one move forward. You can do this.