Consumer, medical, credit card and other debt can get away from you and become insurmountable. Bankruptcy is one way to provide a fresh financial start. But filing for bankruptcy may have consequences and should be carefully examined.

Chapter 7 bankruptcy

Chapter 7, known as straight liquidation bankruptcy is the most utilized filing. It may allow the discharge of liability for almost all debts. Future payments do not have to be paid on discharged debts and creditors cannot seek payment on those debts. A debtor may receive a Chapter 7 discharge once every eight years.

Some debts, however, may not be discharged. These include criminal fines and spousal and child support. Debts such as taxes, student loans and debt associated with fraud may not be eligible for discharge under some circumstances. Taxes may be eligible for discharge if a tax return was filed and a specific amount of time elapsed.

Once you file for Chapter 7 bankruptcy, all property and income which was earned but not received becomes part of the bankruptcy estate and eligible to creditor claims. Assets such as an inheritance or divorce decree proceeds obtained within 180 days from filing may be included in the bankruptcy. Tax refunds for earlier years can be placed in the bankruptcy estate in some circumstances.

Most property is sold to pay off creditors. But certain property is exempt from bankruptcy and you need to identify these exemptions in your bankruptcy filings.

If you lived in Oregon for a certain amount of time, you may take advantage of the Oregon or federal bankruptcy exemptions. Federal exemptions are generally more generous especially if the debtor does not have equity in their home.

Filing for Chapter 7 bankruptcy   

First, you must complete a credit counseling course which is available online or on the phone and may require a fee.

Next, paperwork and court-approved forms must be completed. These need to describe the property you own and the property you want to exempt, current income and expenses, a statement on your current financial situation and what you want to do with the property used as debt collateral. Creditors, including friends and relatives, must be listed with their addresses and the amount owed to them.

All information and a fee needs to be filed with the U.S Bankruptcy Court. The bankruptcy is effective upon filing.  The court will notify all your named creditors and set the time for a hearing which usually occurs within 30 to 35 days. At this hearing, you must attend and answer questions under oath.

Seven days before this hearing, you must also file your most recent federal tax return or transcript. You should also bring financial documents any additional information requested by the trustee, such as your most recent Oregon tax return, to the hearing.  You will also have to complete another counseling course on financial management.

Generally, you will receive your discharge from debts in 60 days if your assets are exempt and creditors do not object to discharge.

Things to consider

Chapter 7 may have serious consequences. It can result in the loss of property such as your home if you have substantial equity, cash on hand, personal property such as appliance and jewelry and your vehicle if you cannot continue to make payments. 

Child and spousal support, public benefits like Social Security and unemployment compensation and pensions are generally excluded. You can also keep your family pet.

A Chapter 7 bankruptcy remains on credit reports for 10 years while a Chapter 13 is listed for seven years.  A good credit score, in the 700 range, may drop over 200 points. Lower scores may fall between 130 and 150 points.

Lower credit scores can impact your ability to obtain credit cards, loans and mortgages. But this negative impact may lessen over time.

Debtors may also consider a Chapter 13 bankruptcy which is used less. This requires a repayment plan, but your assets are not sold off.

There are many things to consider while deciding whether to file for bankruptcy. This process also has time periods and requirements. An attorney can present options and help navigate this process.