Chapter 7 is the most common form of bankruptcy in the United States, which means bankruptcy law is certainly a top law practice for attorneys around the country. Under Chapter 7 bankruptcy, debtors can discharge almost all of their debt while protecting some of their most important assets. If they haven’t been able to manage their debt, many Americans can get a “fresh start” thanks to a successful Chapter 7 filing. But, filing for bankruptcy can be a long and expensive process. Also, sometimes there might be other options that should be explored before filing. Included below are some brief answers to important questions regarding Chapter 7 bankruptcy basics to help you decide if bankruptcy is right for you.
1. Can I File for Bankruptcy? Debtor Eligibility
Chapter 7 is designed to be widely available, but there are limits to who can use it. Chapter 7 can only be used if your income is below a certain threshold, or, if you make more than the threshold, you pass the “means test.”
To determine eligibility, you must first calculate your average monthly income over the last six months. If that amount is less than the median income for a family your size then you are presumed to be eligible to file Chapter 7. But, if your income is more than that median amount, you must determine if you pass the “means test.”
Understanding the “Means Test”
The purpose of the means test is to determine whether you have enough disposable income to repay some of your unsecured debts over the next five years. Disposable income is determined after subtracting your “allowed” monthly expenses, such as rent and food. If you cannot pass the means test then you can still file bankruptcy, but you must file Chapter 13, rather than Chapter 7. This means test can be very fact specific and a lawyer would be advised.
Ineligibility Due to Past Behavior
Many debtors cannot file for Chapter 7 if they have been granted discharge too recently or have committed some “bad acts.” If you have received a Chapter 7 discharge in the last 8 years or a Chapter 13 discharge in the last six then you cannot file a Chapter 7 again until that time has passed. Also, you are ineligible to file Chapter 7 if a previous bankruptcy filing has been dismissed by a judge within the last 180 days under certain circumstances, such as fraud.
2. The Automatic Stay: What Happens After I File Bankruptcy?
Being deep in debt often causes a lot of stress. Not only are you worried about repaying what is owed, but you must deal with barrages of phone calls, debt collectors, and other nuisances. A central feature of bankruptcy is the “automatic stay” which prohibits most creditors and debt collectors from taking action to collect debt from you.
Instead, creditors need to go through the procedures set forth by the Bankruptcy Code. Because the creditors will be punished if they contact you after the automatic stay, you can enjoy some semblance of serenity while you are going through the bankruptcy procedures.
3. Exempt Property: Am I Going To Lose All My Property From Bankruptcy?
Debtors do not lose everything in a Chapter 7 bankruptcy. Bankruptcy law protects a lot of debtors’ property by making the property “exempt” from creditors’ reach. Indeed, most Chapter 7 filings are “no-asset” cases, in which a debtor has no non-exempt property and the unsecured creditors receive nothing.
Exemptions come in two packages: state and federal. Each debtor gets to choose between the two. State exemptions often offer more debtor protection, but vary significantly between jurisdictions. State exemptions mirror federal exemptions.
Importantly, Homestead Exemptions protects the equity in your home—$22,975 worth under federal law. There are a variety of other Personal Property Exemptions as well. For example they include: (1) $3,675 for your car, (2) $1,550 for jewelry, (3) $12,250 total value on household goods, including animals, furniture, books, etc., (4) $2,300 for tools of trade including books. The dollars amounts represent federal exemptions only.
Many other exemptions can be used as well. Look through them closely to determine what other property you can keep safe.
4. Debt Discharge: Will All My Debt be Forgiven in Bankruptcy?
Most debts will be forgiven. The purpose of bankruptcy is to give debtors a “fresh start,” so the discharge covers almost all types of debt. Some examples of debts forgiven in Chapter 7 bankruptcy include:
- credit card debt
- unpaid medical bills
- personal and unsecured loans
- business debts
- attorneys’ fees
However, not all debts will be forgiven. There are also certain debts that are nondischargeable in Chapter 7.
Debts Not Discharged in Chapter 7 Bankruptcy
Although Chapter 7 can be a life-saver for a lot of debtors, it might not eliminate all of your debt. The Bankruptcy Code outlines several classes of debt that will stay with you after the bankruptcy. In most cases, the law does not discharge these debts because they serve a social service.
For example, child support is often not discharged because the child will continue needing support, despite the bankruptcy. Understandably, we don’t want the child to suffer because the parent cannot pay his or her debts.
Some other examples of debts not discharged by bankruptcy are:
- certain taxes
- spousal alimony
- debts owed upon divorce or separation
- unpaid governmental fines or penalties
- student loans
- debt for personal injuries caused by a debtor’s intoxicated driving
Some debts can become nondischargeable when a creditor successfully objects to the bankruptcy court to avoid discharge. These debts typically have to do with unfair behavior from the debtor, such as racking up debt with no intention to pay it back, or committing fraud that caused you to go into debt.
Dealing with a Mortgage or Other Secured Debt
Secured debts, such as a mortgage or car loan, are treated a bit differently in bankruptcy if you are current on payments. If you are not current, however, the creditor can probably foreclose on the property and repossess. That means you would lose your house or car. If possible, prioritize these debts before filing bankruptcy to become current.
If you are current on your payments you now have choices. You can: (1) surrender the property, as in a foreclosure, (2) reaffirm the debt, treating the debt as if no bankruptcy has taken place, or (3) redeem the property by negotiating with the creditor to forgive the debt in exchange for a lump sum. Typically, Chapter 7 debtors don’t want to lose their property and don’t have the money to redeem it, so they continue on with their payments as if no bankruptcy took place.
Now that you understand the chapter 7 bankruptcy basics a little more, you need to decide if bankruptcy is a good option to help relieve your debts. This can be a difficult decision to make, and you should weigh all your options before taking any actions.
Bankruptcy is designed to help debtors start fresh, but it can be an intimidating and complicated process. You should do thorough research to make sure bankruptcy is a good option for you. Also, it’s wise to contact a bankruptcy attorney to ensure you are protecting yourself and filing everything properly.
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