There are two kinds of consumer bankruptcies. The most common is the Chapter 7, which is also called a liquidation bankruptcy. Chapter 7 bankruptcies are governed by a chapter 7 trustee who will take any assets that are available to creditors and administer them to pay those creditors. Usually, most clients’ assets are exempt from the trustee’s reach. Most people filing Chapter 7’s do not have the kind of assets that the Chapter 7 trustee can sell to pay creditors. We call these “no asset” cases.
Most people who file a Chapter 7 bankruptcy because they are drowning in consumer debt such as credit card bills or medical bills and need relief. Filing for Chapter 7 bankruptcy gives the person filing (the “debtor”) relief by wiping out those kinds of debt, which we call “discharging” debt.
What Type Of Debt Is Going To Be Dischargeable In A Chapter 7 Bankruptcy?
The types of debt that are dischargeable in a chapter 7 bankruptcy are consumer debts, such as credit cards, medical bills, and personal loans that are not secured by a car or a house. Student loans are not usually dischargeable in either Chapter 7 or Chapter 13 bankruptcies. Anything owed to the government, such as past due taxes of parking tickets, or child support payments, cannot be discharged.
What Debts Will Not Be Forgiven In A Chapter 7 Bankruptcy?
The following debts typically cannot be forgiven, though there are some rare exceptions:
- Debts owed to any government agency, such as taxes, income taxes, property taxes, or fees like parking or traffic tickets
- Federal student loans and some private student loans debt cannot be forgiven in a Chapter 7 bankruptcy.
- Any obligations for support to a child or a spouse also cannot be forgiven.
What Assets Will I Be Able To Keep In A Chapter 7 Bankruptcy?
Usually, clients are able to keep most, if not all, of their personal possessions. The rules for determining what you get to keep are based on your state’s exemption laws. Each state provides exemptions to protect property from the reach of creditors but the exemptions differ from state to state. Most states have a homestead exemption, which means that the equity in your house is protected up to a certain amount. For example, if the homestead exemption in your state is $100,000 and you own a house that is worth $250,000 with a $150,000 mortgage on it, then your equity is only a $100,000 and the house would be completely protected by the state exemption. In New York, the amount of the homestead exemption varies from county to county.
There is whole categories of exemptions that apply to personal property. You will be able to protect a certain amount of money in your accounts. You should be able to protect almost all, if not all, of your retirement savings depending on where you have them.
Other personal property that will be protected is clothing, furniture, household goods, and electronics. There are caps on the value of all of these things that will be protected, but for most people in a Chapter 7, their property will be valued below those caps and can be protected. The exception could be if the client has collectibles or items that were inherited, such as jewelry, very expensive furniture, a baseball card collection, etc. Many of the exemption laws have a very limited amount that you can protect. Anything above that amount can be taken by the Chapter 7 trustee and sold to pay creditors. If that happens, the trustee is required to pay you back for the value of your property that is exempted.
Who Qualifies For Chapter 7 Bankruptcy?
In order to qualify for Chapter 7 bankruptcy, one must be a United States citizen over the age of 18 years old and must have resided in the area governed by your federal bankruptcy court (your “district for six months prior to when you file for bankruptcy. Additionally, the qualifications are based on how much money one owes, how much income you make, and the amount of money you spend on necessary monthly expenses.
The federal bankruptcy code was revised several years ago to make it more difficult for repeat filers to abuse the bankruptcy process. Each person filing a Chapter 7 bankruptcy must show they are needy enough to qualify. If your household income is below the median income for the county in which you live, then you can go forward with filing Chapter 7 without any further scrutiny.
If your income above the median income, then you would have to pass what we call the Means Test. This is a calculation of your income and expenses to determine whether or not you are really in financial stress. If you pass the Means Test, then you can file a chapter 7. If you don’t pass the Means Test, then we will look to see if you qualify for a Chapter 13 bankruptcy.
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