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Understand specific classifications during a Chapter 7 bankruptcy

A person who files a Chapter 7 bankruptcy is asking the court for debt relief through liquidation. In order to file for this chapter, you have to meet the means test that helps the court to verify that you don't have the ability to pay for these debts through a court-supervised restructuring.

Once you file, your unsecured debts are divided into classes that are assigned priorities. Higher priority debts are paid before lower ones in this process. Secured debts aren't covered in this bankruptcy because they are backed by the collateral, which means the creditor can reclaim the asset to cover the cost of the debt.

Your assets are split into two categories – exempt and nonexempt. The court can take any non-exempt assets to liquidate and pay for your debts. The assets that are exempt can't be claimed by the court, so they are yours to keep.

Some people appreciate the automatic stay that goes into effect when they file. This prevents creditors from being able to contact them trying to collect the debts. One premise of bankruptcy is that the petitioner can't play favorites with the debts, which means it's illegal for creditors to try to pressure you into paying them over others.

At the end of the bankruptcy, all debts that can be discharged will be regardless of the balance. There are some that won't. These include things in 21 categories, including most child support arrears, most student loans and specific tax debts.

The sooner you file for protection, the sooner you can enjoy it. Just be sure that you hold up your responsibilities and know your rights throughout the process.

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