The Truth about Chapter 7 Bankruptcy

Bankruptcy is a way for individuals to find debt relief through the legal process. The extent of the relief is based on a number of factors, such as income, amount of debt, and current financial situation. A Chapter 7 bankruptcy is ideal for those individuals who are faced with an enormous debt burden. Such an accumulation of debt can arise from large medical bills, overextended credit, and other crippling debt.

An individual who declares a Chapter 7 bankruptcy is typically forgiven of debts approximately three to six months after filing. You can only file for a Chapter 7 bankruptcy once every eight years, so if you have filed before, make sure that enough time has passed between your bankruptcies.

Do I Qualify? The Means Test

After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, everyone who wants to file for a Chapter 7 bankruptcy must pass a means test first:

1. You qualify automatically if your income is less than the median in your state for a family of the same size.
2. You qualify if your income is more than the median in your state for a family of the same size, but you do not have the means to pay a minimum of $100 per month toward your debt for the next five years.
3. You do not qualify if your income is more than the median in your state for a family of the same size and you do have the means to pay a minimum of $100 per month towards your debt for the next five years.

If you cannot pass this means test, then you may want to look into filing for Chapter 13.

Property Exemptions

A Chapter 7 bankruptcy is also known as a liquidation bankruptcy because high-value assets will be liquidated and sold to help pay off your creditors; however, some property will be exempt.

• Homestead Exemption: If you do not have equity in your home, you can keep it and your mortgage. If you are not current on your payments, you need to get there before your bankruptcy hearing. If you have to, stop paying on other debts (such as credit card debt) that will be included in your bankruptcy, and use that money to bring your mortgage current. If you have equity in your home, you will have to see if it is less than the exemption amount in your state, unless you are allowed or required to use the federal exemption, which is $125,000.
• Vehicle Exemption: If the current value of your car is less than the remaining loan balance plus the exemption amount, then you can keep your vehicle. If the present value is more than this amount, then you will have to work out a deal with the bankruptcy trustee to buy back your equity in the car (so instead of selling it to someone else, they will sell it to you).
• Retirement Exemption: There is not really a set retirement exemption because your pension rights, 401(k), or any other retirement account is not part of the bankruptcy estate and, therefore, is not at risk of being taken to repay your debts.

 

Unforgivable Debts

Certain types of debt are not forgiven in a Chapter 7, such as child support, taxes, condominium fees, or student loans. However, the fact that you are no longer liable for other debts you have incurred should make it easier to catch up on these debts. If you have accumulated debt because of criminal activity or from injury or death you caused because of using alcohol or drugs, it will not be forgiven. Debts you neglected to list in your bankruptcy filing will also not be discharged.

 

Filing for Chapter 7

Someone interested in filing for bankruptcy typically meets with an attorney or debt counselor to determine which type of bankruptcy for which he or she qualifies. Although people can file bankruptcy on their own, the paperwork can be complicated, so many people elect to use the services of an experienced bankruptcy attorney. Once you contact the attorney, stop using your credit cards. If it is found that you used credit to pay for things or services you never planned to repay, it is considered fraud.

The bankruptcy court requires filers to prove their financial situation by providing evidence of their assets, their income, their expenditures, and a listing of creditors. Proof is filed using official forms provided by the court. The requirements are slightly different, depending on whether the debtor is an individual or business.

The cost of Chapter 7 bankruptcy includes a filing fee, an administrative fee, and a trustee surcharge; these fees total just under $300. An individual who uses the services of an attorney must pay attorney fees separately.

 

The Trustee

The case trustee is the individual appointed by the court to act as an impartial representative. The trustee meets with the debtor and the creditors (known as a creditors meeting) to allow all individuals involved to ask questions and submit evidence and claims.

The trustee will seize all of your non-exempt assets and liquidate them into cash. These things include certain types of jewelry (including family heirlooms), secondary cars or homes, cash or savings accounts, stocks and bonds, and other luxury items.

Creditors with unsecured claims will generally not receive any funds from the liquidation of the individual's assets. In this instance, the trustee files what is called a no-asset report, which means that your debts are written off, giving you the opportunity to start over. After the court proceedings have been held, the petitioner receives a discharge of debts. This means that the debts are essentially wiped clean.

 

Credit after Bankruptcy

Chapter 7 bankruptcy is reported to your credit agencies and will remain on your credit report for up to ten years. Contrary to popular belief, you can get credit again after filing a bankruptcy, as more banks and lenders are making secured credit cards available to risky consumers.