Chapter 7 Bankruptcy Explained

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What is Chapter 7 Bankruptcy? Chapter 11? Chapter 13? What is the difference, and which one is right for your situation? This series of articles will shed some light on the finer points of Bankruptcy law, and give you an idea of which one might fit your situation.

Chapter 7 Bankruptcy:

Filing for Chapter 7 bankruptcy means that you are not going to make a repayment plan with anyone that you owe. Instead, any non exempt assets that you own will be sold, and used to pay the people that you owe.

What does exempt mean for you?

You are allowed to keep certain possessions and property when you file Chapter 7 bankruptcy. To find out which exemptions you are allowed to take, you have to look at your individual state’s law. If you are using a bankruptcy lawyer to handle your case, this is something that they will be able to walk you through.

Common Chapter 7 bankruptcy exemptions include:

  • Your vehicles, if they are worth less than a certain amount.
  • Your clothing (unless you have an extremely expensive wardrobe)
  • Household appliances
  • Your jewelry (up to a certain value – depending on your state)
  • Part of the equity in your home
  • Social Security & Medicare
  • Welfare, or other public assistance.
  • Your life insurance
  • Your pension

As I said though, exemptions vary by state, so to be sure that your property will be exempt, please ask your lawyer, and look up your state’s bankruptcy code.

Items that are generally not exempt include:

  • A second home
  • A second car
  • Any cash that you have in the bank, or other investment accounts
  • Any “collections” of value that you might have: art, coins, etc.
  • Family heirlooms

Do you get to keep your home when you declare Chapter 7 Bankruptcy?

I wish that I could give you a straight yes, or no, answer, but the truth is, it depends. Here is the general way to figure out if that might be allowed. Again, remember that your state could be different, and the best thing you can do is contact a lawyer in your area who knows your state’s laws.

If you are behind on your mortgage when you do to declare bankruptcy, then the bank can foreclose on your home, and a Chapter 7 bankruptcy will not stop them from doing that. If you are current on your mortgage, then whether or not you are eligible to keep your home during a chapter 7 bankruptcy depends on the amount of equity that you have in your home.

It’s a quick, three step process:

  1. Find out how much equity you have in your home - In other words, what’s it’s market value of your home if you were to sell it today?
  2. Subtract any of the following from that value (if you have them) - A second mortgage, a home equity loan, unpaid taxes, or unpaid child support. There are a few other possible exemptions too – check your state’s laws.
  3. What’s left? - If the remaining value of your home is less than what it would cost to sell your home, then you can usually keep your home through a Chapter 7 Bankruptcy.

With your home, just like your other assets, if the courts can not sell them for a reasonable profit, they don’t mess with it, and you are permitted to keep it. Every bankruptcy case is different, and will depend on what you own, and what it’s worth.

Please keep in mind that a qualified lawyer is the best person to have take stock of your assets, and walk you through your state’s applicable laws.

Which Debts are Discharged in Chapter 7 Bankruptcy?

First, it should be clear that declaring Chapter 7 Bankruptcy will not stop repossession or foreclosure. It does take care of a long list of other things though.

  • Credit Card Debt
  • Leases
  • Personal Loans
  • Judgments
  • Claims resulting from an Auto Accident
  • Claims resulting from Negligence
  • Business Debts

Debts that can possibly be discharged in a Chapter 7 Bankruptcy:

  • Property settlements
  • Divorce settlements
  • Criminal debt – forgery, fraud, embezzlement

Whether or not these types of debt can be discharged is up to the court at the time that you file for bankruptcy.

Debts that are not included in a Chapter 7 Bankruptcy:

  • Child Support
  • Recent Taxes, or money owed to the government
  • Criminal fines / restitution
  • DUI (Driving under the influence) auto accident claims
  • Student Loans
  • Debts listed under a previous bankruptcy

Qualifying for Chapter 7 Bankruptcy:

As of October 17, 2005 anyone wishing to file for bankruptcy must meet the qualifications of a “means test”.

This means that your income, and your expenses will be examined to make sure that you meet the qualifications set forth under bankruptcy law. This was done to prevent the possible abuse of the bankruptcy laws by people who actually do have the money, or the means, to repay their debt but do not choose to.

If you do not qualify for Chapter 7 bankruptcy because you fail the means test, you will need to consider declaring Chapter 13 bankruptcy instead. Chapter 13 is basically a bankruptcy with at least a partial repayment plan.

The means tests vary by state, so you will have to look your state up to see whether or not you qualify.

The Chapter 7 Bankruptcy Process:

To begin the Chapter 7 bankruptcy process, the best thing that you can do is to get your paperwork in order. Dig up last year’s tax returns, several months worth of paycheck stubs, all of your bills, copies of any judgments, investment paperwork, mortgage paperwork, etc. Take those with you when you see a lawyer.

This step can be difficult if you have been avoiding your financial situation, so be sure that you do take the time to get absolutely everything in order. If you miss a bill, or do not give your lawyer all of the information they need, it will come back to bite you later, after your bankruptcy has been discharged.

Your lawyer will sit down with you, explain the means test, look over your paperwork, and tell you whether or not you are a good candidate for Chapter 7 Bankruptcy. If you are handing your bankruptcy paperwork yourself, you will save money, but you lose the comfort of having an expert guide you through the process.

Your lawyer can also explain which of your possessions can be considered exempt, and which ones are not exempt. If you do hire a lawyer, they will arrange your court dates, the mandatory credit counseling that is required under the 2005 bankruptcy laws, and take care of everything beyond that point.

As soon as you officially file for Chapter 7 bankruptcy, collection companies must stop contacting you. This is called an automatic stay, and it means that everything is frozen until the court decides the outcome of your bankruptcy.

If you do get collection calls after you have filed for bankruptcy, make sure that you give the collection rep your case number, and lawyer’s information. By law they cannot contact you again.

You are not required to continue paying on any debt that is to be included in your bankruptcy once you file.

Any assets that were not exempt will be taken from you, sold, and used to pay off some of your creditors.

You will have to have a session with a credit counselor both before, and after you file for bankruptcy. Most law offices are associated with a credit counseling agency, and they will make the process painless.

Between 20 and 40 days after your file your bankruptcy petition, you are required to be present for a legal meeting. This is known as a 341 meeting, and it is an official meeting of you and your creditors (who most likely will not show up anyway.) You will be required to verify your income, and financial status, as well as your debts under oath.

After you have your 341 meeting, your creditors will be given up to 60 days to challenge your right to discharge their debt. Most creditors decline this right, but in a few cases it may happen. It is at this point that you can choose to “re-affirm” your debts with your creditors if you want to.

Reasons for “re-affirming” a debt would include wishing to keep a car, or credit cards or any portion of your debt after you declare bankruptcy.

If your creditors do not dispute your right to declare bankruptcy, then about 60 days after your 341 meeting your bankruptcy will be discharged, and you will no longer legally owe money to any creditor who was included in your bankruptcy filing.

Have a question for us? Leave a comment below!

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8 Responses to “Chapter 7 Bankruptcy Explained”

  1. David Says:

    I have both personal credit card debt, and business credit card debt. The business credit cards have both my name on them and then name of the business which was setup as a corporation. Can I still file Chapter 7 and include the business credit card debt in my filing with the hope that it will also be disharged by the court along with my personal credit card debt? If not, I simply have no money for anyone to get anything from me anyway, so will those business credit card creditors simply give up? The only thing I have is a home, but the part that is exempt, ($50k in California), only leaves about $40k of equity which would be gobbled up by realtor and broker fees. So would a creditor even bother to force the sale of my home? …or the trustee for that matter?

  2. Phillip Says:

    My exwife keeps taking me back to court. I am representing myself because I do not have any money. She wants me to pay her attorney fees for the last time that we had to go to court. If the court should find that I have to pay these fees, is this something that my wife and I could include in our bankruptcy if we decide to file?

  3. leroy harrell Says:

    Should I include my recently opened pre-paid mastercard as a part of my bankruptcy filing? I only keep enough money in the card to make small amounts of online purchases.

  4. Alisia Cross Says:

    Hi I was wondering what can be considered an expensive wardrobe like would Dior or Dolce and Gabbana shoes be considered expensive even if you got them sort of cheap and if considering filing Chapter 7 do you have to be up to date on your unsecured/credit card bills.

    Thanks,

    Alisia

  5. Alisia Cross Says:

    Oh also could my mom’s car that I drive be taken away and any savings or money markets that she set up in my name that I don’t necessarily know about be taken.

    Thanks,

    Alisia

  6. Lois Greene Says:

    By paying property taxes with a credit card over a year before filing a chapter 7, can the credit card debt be discharged? Can you site the Federal Bankruptcy tax code for this?

  7. desves Says:

    we filed a chapter 7 in nov 2008 we surrenderd a rental property at a 341 meeting. we were told by our lawyer that since we surrenderd the property we could not go into the prop. and it was not ours anymore it was the banks now in april of 2009 we were sent a letter telling us we were responsible for the upkeep of the home. and the city was fining us 1000.00 We have a hearing on this case next month
    The prop. was sold sept. 2009 by the bank we just did what our lawyer told us, the city is telling us that it didn’t matter it was when the bank took it over. and the bank told us they didn’t take it over until aug. 2009 we are in WV any info would be appreciated

  8. Linda Says:

    I had a small business and did not do my previous taxes. My Attorney said to not worry and dont pay the money for an accountant to do it. I am still getting letters by the irs and state to my closed business to do the old taxes and is estimating my tax at 21,000. I did not make money that year.
    Why would he tell me not to worry about the taxes I didnt do for the business.
    Could I get in trouble?
    should I do my taxes

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