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I would like to know if I should file chapter 7 bankruptcy?

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I have 2 vehicle repossessions on my credit report. I am currently a co signer on a vehicle not in repossession. Also, on my credit report, I have a student loan, municipal tickets, utility bills and medical bills. I am currently employed but my household falls below the income guidelines for chapter 7. I am recently divorced (less than one year). I do not own any real estate property but I hope to own a home in the near future ( within 2 years or less).

About Bankruptcy

Bankruptcy is a federal court process that provides legal relief from overwhelming debt. US bankruptcy law lives in Title 11 of the United States Code and is administered by federal bankruptcy courts in every district. There is no state bankruptcy.

The two consumer chapters are:

  • Chapter 7 (liquidation) — most consumer debts (credit cards, medical bills, unsecured loans) are discharged within 4 to 6 months. A trustee may sell non-exempt assets, though most filers have no non-exempt assets to sell. Available only if you pass the means test, which compares your income to your state's median.
  • Chapter 13 (reorganization) — you keep your assets and repay creditors a portion of what you owe over 3 to 5 years under a court-approved plan. The remaining unsecured debt is discharged at the end. Often used to save a home from foreclosure or a car from repossession.

Filing a bankruptcy petition immediately triggers the automatic stay, which stops most collection actions: wage garnishment, lawsuits, foreclosure sales, repossessions, and most utility shutoffs. The stay is a powerful tool and one of the most important reasons people file.

Not all debt is dischargeable. Common non-dischargeable debts include most student loans (with narrow exceptions), recent income taxes, child support and alimony, debts from fraud or willful injury, and criminal restitution.

Exemption laws — what you get to keep — vary by state. Some states require you to use the state exemptions; others give you a choice between state and federal exemptions. Typical exemptions cover a primary residence (homestead exemption), one vehicle up to a value cap, household goods, retirement accounts, and tools of trade. Retirement accounts are fully protected in bankruptcy in nearly every state.

A Chapter 7 discharge stays on your credit report for 10 years and a Chapter 13 discharge for 7 years, but most filers see their credit scores recover within 12 to 24 months. You can usually get a new credit card within months and a mortgage within 2 to 4 years.

Bankruptcy filings require court-approved credit counseling before filing and a debtor education course before discharge.

Reviewed by AttorneyQnA Editorial Team · Last updated

Relevant law

  • 11 USC §362 Statute
    Automatic stay
    Filing a bankruptcy petition immediately stops most collection actions — wage garnishments, foreclosure sales, repossessions, and most utility shutoffs.
  • 11 USC §523 Statute
    Non-dischargeable debts
    Lists debts that survive a Chapter 7 discharge: most student loans, recent income taxes, child support, debts arising from fraud, drunk-driving damages.
  • 11 USC §707(b) Statute
    Chapter 7 means test
    Compares filer's income to state median; if above median, additional analysis of disposable income determines whether Chapter 7 is available or whether the case must be converted to Chapter 13.

Common questions about Bankruptcy

Will I lose my house if I file bankruptcy?
Almost always no — provided your equity is within your state's homestead exemption. In Chapter 7, the trustee can only liquidate non-exempt assets. In Chapter 13, you can use the repayment plan to catch up on mortgage arrears and stop a foreclosure sale. Most filers keep their homes.
Will bankruptcy clear my student loans?
Usually no. Student loans (both federal and most private) are excluded from discharge under Bankruptcy Code §523(a)(8) unless you prove "undue hardship" — a high bar called the Brunner test that few debtors satisfy. Recent administrative guidance from the Department of Education has made hardship discharge somewhat more accessible.
How long does bankruptcy stay on my credit report?
Chapter 7 stays on your credit report for 10 years; Chapter 13 for 7 years. Practically, most filers see their credit scores recover within 12 to 24 months, can get a new credit card within months, and can qualify for a mortgage within 2 to 4 years post-discharge.
Can I keep my car in bankruptcy?
In Chapter 7, yes if your equity is within the vehicle exemption. If the car is financed, you must stay current on payments and (in most cases) sign a reaffirmation agreement to keep it. In Chapter 13, you can roll past-due car payments into the plan and "cram down" the loan to current value if the loan is older than 910 days.
What debts cannot be discharged in bankruptcy?
Common non-dischargeable debts include: recent income taxes (3-year and 240-day rules), most student loans, child support and alimony, debts arising from fraud or willful injury, drunk-driving damages, and criminal restitution. Most credit-card debt, medical bills, and personal loans are dischargeable.

5 Attorney Answers

I suggest you call a local attorney and sit down for a free consult, you should find one here on Avvo. Meanwhile, It's difficult to be more specific as we don't know what your income is, what your assets are or how much you owe.
Good luck!
Rob
The only person who can decide if you should file a Ch7 is you. that being said, you sound like a good candidate for a Ch7, if you are correct that you are below median income. Be aware that it is very difficult, though not impossible, to discharge student loans in bankruptcy and also that since you are a co-signer on a vehicle loan, that your co-signer on that loan should monitor their credit report closely to make sure that their credit is not affected by your filing. You may have to sign and file something called a reaffirmation agreement for that car. Depending on the tickets, those debts may or may not be dischargeable. Past due utility bills can be discharged but if you depend on that utility for whatever they provide, you may have to pay a deposit of up to a couple months regular service charges. You should also be aware that many mortgage companies may impose stricter lending requirements on folks who have recent Ch7 discharges so it may be difficult to obtain financing for a mortgage in the near future.
To get a fuller understanding of whether Ch7 can help you (it probably can, especially with 2 vehicle repos on your credit) take advantage of the fact that most bk attorneys offer free initial consultations.
At a minimum, I would suggest that you consult with a bankruptcy attorney. It sounds like you have some items on your credit report that will prevent you from obtaining a mortgage to purchase a home. Also, the auto creditors tend to be aggressive in filing lawsuits to collect their debts, and bankruptcy can prevent that. Assuming you do not have the funds saved up to make settlements with the auto, medical, and utility creditors, bankruptcy may be the best solution for credit repair over the long term. Chapter 7 Bankruptcy can discharge the auto, medical, and utility creditors, but you would have to make arrangements with the others to get them out of delinquency status. Keep in mind that generally, you would have to wait at least 2 years to obtain a mortgage after your Chapter 7 discharge. A good bankruptcy attorney will, in addition to handling your bankruptcy case, help you with a strategy to improve your credit after bankruptcy so that you can become a homeowner as soon as possible.
Just from your email, it sounds like Chapter 7 should work for you to eliminate your debts, other than the student loan and municipal tickets. But you really need to meet with a local experienced bankruptcy attorney. We have 10 locations in the Chicagoland area and our office consultation is free.
With regard to buying a home, no one can tell you when you would be able to do so, but with the information you provided, most likely that can not be accomplished without either paying the debts and getting rid of them through a bankruptcy.
Filing bankruptcy should be worth it. If you have a heavy debt load, heavy in your opinion, then its an option to consider. But if you filing because of the two repo's on your credit realize that within a 5 years or so the repos will fall off your credit and you can negotiate some of the other debts.
The municipal debts and student loans are unaffected by the bankruptcy so there is no benefit there. Speak to a bankruptcy attorney but also speak to a consumer lawyer who can help you assess your situation outside of bankruptcy.
I have come across several clients who should never have file bankruptcy but were convinced that they had to.
Be careful and get informed. There are alternatives to bankruptcy.

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