Chapter 7 is when you can't repay debt, and is generally for lower income households. You don't make any more payments on the credit cards, but in some cases could lose assets.
Chapter 7 bankruptcy is when you can’t afford to repay any debt, after all the ordinary household bills are paid. It’s the most common type of bankruptcy. In Santa Clarita and Los Angeles County, we’ve helped thousands of people file Chapter 7 cases over the past 15 years. In short, you don’t pay debt back, and the process is relatively quick.
But beware. Chapter 7 is what they call liquidation bankruptcy. That is, you can lose stuff. You say, “I don’t have anything.” But aside from home equity, cars, and money in the bank, there are other assets you may have that aren’t so obvious. What about that claim someone owes you that you may or may not be suing them for? Or maybe that tax refund that you may get this year? Do we consider that thing you gave to your ex or brother or cousin, or that family debt you paid back 3 months ago? And where ever did all that money go you got from that big settlement or retirement disbursement you took 2 years ago?
So, even if Chapter 7 bankruptcy sounds great to you, not everyone qualifies. People who earn too much income need to do a Chapter 13 bankruptcy. The more money you earn, the harder it is to be eligible for Chapter 7 bankruptcy. Congress decided that a couple earning, say, over $100,000 a year probably has money to repay some debt. To try to be fair, it made a formula to filter out high-earning people with debt so Chapter 7 bankruptcy is only for those who truly need it. The means test looks at:
Finally, after everything is calculated, either the person/couple qualifies for Chapter 7 or doesn’t. If their income is too high, there are still options. Maybe earnings can go lower in the months ahead, so it could be prudent to wait. Or, maybe the debtor can just file Chapter 13 bankruptcy and pay back whatever they can afford. Either way, there’s a solution.