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:
- 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?
- 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.
- 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
- Personal Loans
- 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.
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