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Chapter 7 Bankruptcy filing and Exemptions

When you have no hope of repaying debts with your income and are likely to be sued by creditors/lenders, it's time you file Chapter 7 bankruptcy. With this type of bankruptcy, you can pay off your debts by selling your assets under the supervision of the court. To know how Chapter 7 bankruptcy works and how it can help you, go through the information given below:

When to file Chapter 7 bankruptcy

You can file Chapter 7 if you're in any of the situations given below:
  • You don't have any cash to pay off debts.
  • You don't have cosigners to repay debt.
  • Your creditors may sue you.
  • Some of your accounts are in collection.

How to qualify for chapter 7

You need to fulfill the following criteria in order to qualify for Chapter 7 bankruptcy.
  • Credit counseling: You must have attended a credit counseling session within 6 months prior to filing chapter 7 bankruptcy.

  • Means Test: You should have passed Chapter 7 bankruptcy Means Test irrespective of whether you are solvent or insolvent. Under the Means Test, if your income is less than the median income of your family size in your state, you can qualify for chapter 7. Check out how Means Test determines if you qualify for chapter 7 or 13.

  • Prior bankruptcy: You haven't received a Chapter 7 bankruptcy discharge within past 8 years or Chapter 13 discharge within past 6 years.

  • Bankruptcy dismissal: You have not come across a bankruptcy dismissal within the past 6 months on account of failure to appear before court or follow court orders.

Assets listed/utilized in Chapter 7

The assets which are sold off to pay creditors are mainly liquid assets, that is, those which can be easily converted into cash (such as checking and savings accounts). However, you'll have to list all your assets under Chapter 7. The trustee will then decide which can be sold off to repay debt.

Assets to be listed are:
  • Real property you own individually or with a co-owner
  • Property received as gift, inheritance or divorce settlement
  • Life insurance proceeds
  • Personal property - household items, cash, retirement money etc.

Whether you'll be able to keep all the above assets will depend upon Chapter 7 bankruptcy laws regarding exempt and non-exempt assets.

Bankruptcy Chapter 7 exemptions

Chapter 7 bankruptcy laws provide exemption on the sale of certain assets. Such assets are known as exempt assets. Bankruptcy Chapter 7 exemptions are of 2 types - Federal and state homestead exemptions (vary from state to state). Around 16 states allow debtors to opt for either the Federal exemptions or bankruptcy Chapter 7 exemptions allowed by the state itself. In other states, the debtor can avail only the state exemptions.

Exemptions on house and car:
Bankruptcy Chapter 7 exemptions apply only if you have equity (your current home value minus costs of sale less balance on mortgage or other liens) in the property. If your home equity exceeds the Federal or State exemption, whichever you choose, you may lose the home. However, if you have no equity in the house, it cannot be used to pay off your debts. In such a case, you can keep the home as long as you pay for the liens.

In case of a car too, if you have no equity, you can keep it with you. If you have equity in the car which exceeds the exemption, it can be sold off to repay your car loan. Know more on bankruptcy Chapter 7 exemptions.

If you still owe money after the property is sold off to pay your lender, then you can reaffirm the debt and remove the lien on your property (home or car).

Other Exemptions:
There are certain assets which are unaffected by Chapter 7 bankruptcy. Such assets are your Pension and 401(k) or 403(b) retirement plans protected by the Employee Retirement Income Security Act. Social security benefits are also protected from legal actions while you're in bankruptcy. Traditional and Roth IRAs (Individual retirement accounts) are exempted up to $1 Million as per bankruptcy law enforced in 2005.

Moreover, IRA assets rolled over from 401k or 403b plans come under bankruptcy Chapter 7 exemptions and have unlimited protection (not limited to $1 Million) from creditors' claims. Such protection does not depend upon the debtor's state or the value and growth of rollover assets.

However, if the debtor receives minimum distribution, hardship distribution, or 72(t) distribution, his IRA is no longer protected from creditors. Moreover, if money is withdrawn, the IRA accounts are no longer protected under bankruptcy.

Pros and Cons of filing chapter 7 bankruptcy

Here are some of the pros and cons of filing Chapter 7 bankruptcy.

Pros:
  • No Personal liability: Chapter 7 releases your personal liability towards debts. You receive a discharge order within 4 months of filing the petition.

  • Exemptions: You can retain certain assets as per Exemptions under chapter 7.

  • Prevents legal actions: Once you file Chapter 7, it stops legal actions taken by your creditors. Such actions can be lawsuits, judgments, foreclosure, repossession, wage garnishment and collections. As per Chapter 7 bankruptcy laws, creditors shouldn't even make harassing calls demanding payments from debtors.

  • Fresh financial start: Since Chapter 7 discharges your debts, you get the chance to organize and manage your finances better.

Cons:
  • Lose assets: You lose assets as they are sold off to pay your creditors/lenders.

  • Retain property liens: Chapter 7 does not remove property lien due to secured debts (mortgage or car loan). So, even if you get a discharge, you'll have to pay off the lien in order to save your property from foreclosure or repossession.

  • Effect on Credit Score: Your credit score drops down by 250 points or so when you file file Chapter 7 bankruptcy. The bankruptcy remains on your credit report for about 10 years.

  • New credit/mortgage: It's difficult to qualify for new credit or mortgage after you file Chapter 7 bankruptcy. If the market isn't doing well, no lender would offer you a mortgage even at higher rates of interest. It'll take at least 2 years to qualify for an FHA loan and 4 years for a conventional mortgage at affordable rates of interest. Check out a forum discussion on getting mortgage after bankruptcy.

No doubt bankruptcy chapter 7 helps you eliminate debts but there are negative aspects as well. You need to understand how it can work in your favor. Only then you can use it to your benefit and lead a debt free life.

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anonymous 24

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Post     Post subject: chapter 7 bankruptcy & no tax return

my husband and i would like to file chapter 7 bankruptcy and infact need to badly, but he has no tax returns because he was paid under the table. however i do have mine. we werent married until march of this year though. Can we still file without a tax return to prove income.
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Mini Profile  helping_user
helping_user


Joined: 31 Mar 2006
Posts: 815
Location: Hawaii

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Post     Post subject: Re: File chapter 7 without a tax return

Hi
Quote:

Can we still file without a tax return to prove income.


You can file chapter 7 bankruptcy without a tax return. But you need to clear any overdue tax return within few weeks of filing chapter 7. Otherwise, you get disqualified for bankruptcy chapter 7.

Thanks
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tony tinstar

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Post     Post subject: thinking of it

i own a home with very little equity in it (10k)
i have outstanding debt of 15k (badloan,phonebill,carinsurance,other misc.)
i have a full time income of 40k and my taxes are filled and are in good shape. only 1 year left on my mortgage term and im scared of not getting renewed with anyone and forced to sell. If I file chapter 7 bankruptcy, can i keep my home. or should i sell it first then file?
thanks,
Tony
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Mini Profile  Jessica
Jessica
Community Mentor
Community Mentor

Joined: 08 Jun 2004
Posts: 818
Location: OHIO

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Post     Post subject: RE: sell property and file bankruptcy

Hi Tony,

Welcome to our community forums.

If only 1 year is left out of the mortgage, try paying it off as you have been doing. For the other bills, you can go for debt consolidation program. But I don't think you need to file bankruptcy chapter 7 or 13 just to pay off the mortgage and most importantly you will first have to qualify for the bankruptcy type before you can file.

Alternatively, you can sell off the home if you are not keen on keeping it and then file bankruptcy for debts other than the mortgage, preferably chapter 13 which will have better impact on your credit score compared to chapter 7 bankruptcy.

Any thoughts that you would like to discuss further?

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http://jessica.mortgagefit.com/
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Post     Post subject:

Tony,

i donth think you need file chapter 7 bankruptcy. As mentioned above- keep paying off as you have been doing and for other bills go for consolidation program:0

Riko
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Mini Profile  larry



Joined: 27 Jun 2007
Posts: 3328


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Post     Post subject:

Hi Riko,

Welcome to the forum.

Good information mate Smile. Why don't you join this community.

I think you can help the community with some sound suggestions and valuable information and at the same time can earn some $$$. Also can make thousand of friends from all over the world Smile

You can also introduce yourself and let the world know about yourself at http://www.mortgagefit.com/introduce-yourself.html

Best of luck,
Larry
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ROB TAYLOR

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Post     Post subject: chapter 7 bankruptcy

We have some check cashing loans, will chapter 7 bankruptcy stay prevent them from cashing those checks.
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Ryan12

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Post     Post subject:

I don't think bankruptcy can prevent one from cashing checks, even though it's chapter 7 bankruptcy.
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Sassy

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Post     Post subject: mortgage fraud

I am thinking about filing chapter 7 bankruptcy. i have two mortgages. I acheived them as stated income. Does stated income constitute fraud?
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Mini Profile  Caron
Caron
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Joined: 19 Jul 2005
Posts: 1562
Location: florida

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Post     Post subject:

Hi sassy,

Welcome to our forums.

I don't think stated income constitutes fraud. But what makes you think so?

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In our Hearts

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Post     Post subject: Re: Pay Day Loans

I have PDLoans and I want to know if they are legitimate PDL Companies: 1. United Cash loans
2. Cash Advance USA
3. Shop on line
4. Cashnet USA
5.VIP

Thank you

jennifer
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Mini Profile  jerry
jerry
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Joined: 17 Oct 2005
Posts: 1838
Location: MICHIGAN

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Post     Post subject:

Hi In our Hearts!

Among all this companies, United Cash Loans is the one on which there has been a lot of discussions. You can go through this link to know whether people are satisfied or not.

http://www.mortgagefit.com/companies/unitedcashloans.html

Thanks,

Jerry
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unknown

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Post     Post subject: bankruptcy

Hi, my bankruptcy got thrown out of court because I was in the hospital after an accident and when i got out I wasnt given enough time to get all the documents out. How soon after can I file? Also, I had credit counceling if I have to wait do I have to re-take itr?
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Mini Profile  Niicss
Niicss


Joined: 03 Oct 2005
Posts: 2986
Location: New Jersey

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Post     Post subject:

Hi unknown

You will be able to file bankruptcy again though it has been dismissed once. But in case, if your bankruptcy has been discharged due to your failure to obey the court, then you may have to wait for 180 days after dismissal before filing bankruptcy again. To know more about the same topic, check out the following link:
http://www.mortgagefit.com/discuss/bankruptcy-dismissed.html

Thanks.

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