Chapter 7 Bankruptcy
There may come a point when you can no longer afford to pay your mortgage and are considering filing for Chapter 7 bankruptcy. More than one million people filed for Chapter 7 bankruptcy in 2010. Chapter 7 bankruptcy involves the sale of your property so the proceeds can be used to pay your creditors.
Are you eligible to file for Chapter 7 bankruptcy?
Not everyone is eligible to file Chapter 7 bankruptcy. Your family income for the six months prior to the filing must be less than the median family income for your state.
What is the process for filing Chapter 7 bankruptcy?
- File a petition with the bankruptcy court.
- Participate in credit counseling. You will have to participate in credit counseling before you file your bankruptcy petition. You also will need to participate in a debtor education class after you file. Both pre- and post-filing credit counseling classes can be done in person, online or via telephone.
- File any past due taxes.
- File paperwork detailing your creditors, the amount of debt owed, income information, expense information and property information.
- File a list of exempt property.
A trustee will be assigned to your case who will repay your creditors by selling your assets. While some assets may be exempt, laws vary from state to state as to what those may be. The bankruptcy trustee will sell any non-exempt property and pay your creditors with the proceeds. The trustee will decide which non-exempt property will be sold. If selling the property would not generate much income, or if the trustee will have difficulty selling it, you may be able to keep the property.
There will be a hearing where you will testify about your income, property and debts. Creditors may appear on their behalf at the hearing. You will have the option of reaffirming your debts at this time. By reaffirming a debt on a piece of property, the property will not be sold and you will continue to make payments on the property to the creditor. All other non-exempt debts will be discharged. It is important to remember that not all debts are dischargeable in bankruptcy, including:
- Child support
- Student loans
- Past due income tax from the previous three tax years
- Judgments against you for injuries caused by driving while intoxicated
- Recent debts and cash advances
How does filing for Chapter 7 bankruptcy affect home ownership?
You may be able to live in your home while the bankruptcy proceeding is pending. During that time, you will not have to pay your mortgage. You will be discharged from your mortgage, but will most likely have to give up your house as well. Although this will be difficult, Chapter 7 bankruptcy provides relief from a mortgage that you are no longer able to pay.
How does filing for Chapter 7 bankruptcy affect your credit?
The bankruptcy can remain on your credit report for up to 10 years and can lower your score initially by 200-350 points.
Are there any tax consequences to filing for Chapter 7 bankruptcy?
There may be some tax benefits related to your home loan by filing Chapter 7 bankruptcy. Under normal circumstances, if your loan is not a mortgage, was not used for home improvements, or is not on your principal place of residence, you may owe taxes on any losses your lender incurs as a result of a foreclosure sale on your property. By filing for Chapter 7 bankruptcy, however, you will be exempt from these losses if the debts are discharged.