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Chapter 7 Bankruptcy filing and exemptions

Posted on: 08th Nov, 2005 10:12 pm
If you have no hope of repaying debts and are about to be sued by creditors/lenders, it's time you file Chapter 7 bankruptcy. With this type of bankruptcy, the court sells your nonexempt property to repay as much of your debt as possible. To learn how Chapter 7 bankruptcy works and how it can help you, go through the information below:

When to file Chapter 7 bankruptcy

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

How to qualify for chapter 7

You need to fulfill the following in order to qualify for Chapter 7 bankruptcy.
  • Credit counseling: You must have attended a credit counseling session 6 months prior to filing chapter 7 bankruptcy.
  • Means Test: You must qualify under the Chapter 7 bankruptcy Means Test. Under the Means Test, if your income is less than the median income of another family of the same size in your state, you qualify to file Chapter 7. Find out how Means Test determines if you qualify for chapter 7. Check out how Means Test determines if you qualify for chapter 7 or 13.
  • Prior bankruptcy: You have received a Chapter 7 bankruptcy discharge within the past 8 years or a Chapter 13 discharge within the past 6 years.
  • Bankruptcy dismissal: You have not had your bankruptcy dismissed within the past 6 months for failure to appear or contempt of court.

Chapter 7 Non-exempt Assets

Most of the assets that are sold during Chapter 7 are personal property, such as your electronics or clothes. You will have to list all your assets as well as your liabilities when you file Chapter 7. The trustee will review the list of assets and divide your property according to what state law has said you may keep. The Federal government has enacted an exemption scheme that a few states allow you to use as an alternative to a state scheme, or if you are ineligible for the state exemptions due to residency requirements.

Bankruptcy Chapter 7 exemptions

Each state allows you to keep different types of property when you file Chapter 7 bankruptcy. Every state allows you to keep a part of your interest in your home and car if you include them in the bankruptcy estate. Many states have exemptions that allow you to keep heirlooms and other personal property, as well as your retirement funds.

Every state has a residency requirement that you must meet when you file Chapter 7. You must have been living in the state for at least 2 years before filing bankruptcy in that state or if you have not lived in any other state within the previous 2 years, but have spent the majority of the 180 day period preceding the 2 year period in that state.

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 State or Federal exemption, you may lose the home. However, if you have no equity in the house, it cannot be used to pay off your debts. In this case, you can keep the home as long as you pay the mortgage.

The same is true for a car, if you have no equity, you can keep it. If your equity in the car exceeds the exemption, it can be sold off to repay your car loan. Learn more about bankruptcy Chapter 7 exemptions.

If you wish to reaffirm your car loan and/or mortgage, then the property will not be included in the bankruptcy estate and you will be able to keep them.

Other Exemptions:
Apart from your home and car, there are other assets which may qualify for exemptions under Chapter 7 bankruptcy. The Federal government and most states allow debtors to keep all or part of their pensions, IRAs, and social security during bankruptcy. You can also receive protection for certain business assets if you are involved in a partnership or are a sole business owner.

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 any debts that are included in your bankruptcy estate and not repaid during Chapter 7. You receive a discharge order within 4 months of filing the petition.
  • Exemptions: You can retain certain assets under chapter 7.
  • Prevents legal actions: Once you file Chapter 7, it stops all lawsuits and collection actions being pursued by your creditors. Under Chapter 7 bankruptcy law, creditors cannot make harassing calls demanding payments from debtors until and unless the case has been dismissed.
  • 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 if they are sold off to pay your creditors/lenders.
  • Retain property liens: Chapter 7 does not remove property liens due to secured debts (mortgage or car loan) unless you give up the house or car during Chapter 7. 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 if you keep the house or car.
  • Effect on Credit Score: Your credit score decreases by 250 points or so when you file Chapter 7 bankruptcy. The bankruptcy remains on your credit report for 10 years.
  • New credit/mortgage: It's difficult to qualify for new credit or a mortgage after you file Chapter 7 bankruptcy. If the market isn't doing well, no lender would offer you a mortgage even at high interest rates. It'll take at least 2 years to qualify for an FHA loan and 4 years for a conventional mortgage at an affordable interest rate. Check out this forum discussion on getting mortgage after bankruptcy.
Chapter 7 bankruptcy helps you eliminate debts but there are negative aspects as well. You need to understand how bankruptcy can work in your favor. Only then you can use it to your benefit and lead a debt free life.

Related Forum Discussions
With respect to the amount of funds in a savings account, how does the filing of a chapter 7 bankruptcy affect a couple's assets saved in their joint savings account? Is there a formula of some sort that can be used to determine how much savings would be considered too much? Is there a threshold of savings account assets that would be exempt from loss?
Posted on: 18th Aug, 2009 07:22 pm
Hi,

To DLJ,

As far as I know, the trustee will not sell off your personal property to pay off the creditors. Your real estate property, vehicles and savings would be taken into consideration while paying off your creditors.

To anonymous,

As far as I know, in order to qualify for Chapter 7 bankruptcy, you need to clear the Means Test. You will have to find out if your average monthly income for past 6 months is higher than the state median income for a family of your size. If it's higher then, you won't be able to file Chapter 7. However, if it's low, then, you can file Chapter 7 bankruptcy.
Posted on: 18th Aug, 2009 09:04 pm
Going w/ document preparation service to file, have been self employed for years, living off credits, and not file tax returns due to low or no income. Can i file w/o any tax returns
Also abstract judgmt against my name will that be dismissed.
Got lots of debt but no real assets left, Property is unpside down,
IRA has $20K left.

thanks
Posted on: 20th Aug, 2009 03:49 pm
I own a business and rent my house out but the money I get for rent just pays the morgage. ( I live with my boyfriend) My business is making no money and I owe thousands, I can close my business but I will cost me alot to close. If I close I have no job no income.What do I do. I owe utilities,Business loan. taxes, Credit cards, you name it I owe it. Can I file a chapter 7? What happens to my renters and I also have 30K equity in my home
Posted on: 20th Aug, 2009 06:46 pm
what happens to my renters?
Posted on: 20th Aug, 2009 07:14 pm
Hi,

To Guest,

In my opinion, you need to contact a bankruptcy attorney and discuss your case with him. He would help you in understanding whether or not you would be able to file bankruptcy without any tax returns. If you are able to file bankruptcy, your unsecured debts will get discharged.

To anonymous,

In my opinion, you will be able to file a Chapter 7 bankruptcy, but it would be better to consult an attorney and check out if you clear the Means Test. Once you clear the Means Test, you would be able to file Chapter 7. If you don't clear the Means Test, you will have to file Chapter 13. As far as your renters are concerned, you need to inform them about your plans to file bankruptcy and give them the required time to move out of the property.

To sineadhuff,

Your question is not clear to me. Can you give some more details?
Posted on: 20th Aug, 2009 08:31 pm
When filing chapter 7, can you include student loans and payday loans
Posted on: 21st Aug, 2009 02:43 pm
I'm in the process of filing chapter 7 my attorney will file the petition next week but before doing so, I have a few questions..I have about 2,400 in a money market ira rollover account I rolled over from a 401k plan I had with a previous employer back in the 80's. I haven't touched it until today because I need it to cover some bills so I withdrew $500. I understand the irs penalties if I do not replace it within 60 days. My question is, is that account safe from the bankruptcy?
Posted on: 22nd Aug, 2009 03:46 pm
my husband has an active chapter 13 bankruptcy. i am in the process of filing for a legal separation. we own our home i am primary on the mortgage loan and he is a cosigner. i am making preparations to move out of our home. i have excellent credit and i would like to purchase a property for myself and our minor child to reside in after the legal separation. one of the stipulations of his chapter 13 is to make the payments on the home we own jointly. he has not been making the payments timely. is there something i can do to relinquish my responsibilities with regards to our mortgage? i have no interest in keeping this property once i leave. i am willing to relinquish all rights to it. how can i remove my responsibilities for this mortgage? i need to act fast before his actions affect my credit ratings. please help!
Posted on: 23rd Aug, 2009 07:46 am
Hi,

To dk,

Payday loans are discharged through a bankruptcy filing. However, student loans are no longer dischargeable in any chapter of bankruptcy. But if you can prove that repaying the loan creates an undue hardship on you or your family, there is a chance that the bankruptcy court would consider your request. You'll have to prove that paying the student loan will not allow you to maintain the minimum standard of living for yourself and your dependents. There are some courts which will discharge a part of the loan on a showing that repaying it in full would be a hardship on your part.

To Guest,

Once you file bankruptcy, you'll get a legal protection against all your creditors called the "automatic stay." If your creditor wants to collect the dues from your, he will have to file a case against the automatic stay. As far as I know, the judges rarely lift a stay for the IRS. So, in my opinion, your IRS account will be safe.

To SOS,

As you are the primary borrower of the loan, it would be difficult for you to relinquish your responsibility regarding the loan. The lender will not allow you to remove your name from the mortgage docs. Once the bankruptcy is discharged, then you can negotiate with your lender and check out if your husband can refinance the loan. This will help you in removing your name from the mortgage docs.

Thanks
Posted on: 23rd Aug, 2009 08:39 pm
i own a business that has not filed taxes for 4 years and i need to file a chapter 7 bankruptcy would i qualify
Posted on: 05th Sep, 2009 03:08 pm
Hi camden!

Welcome to forums!

I don't find any reason as to why you won't be able to file Chapter 7 bankruptcy. In my opinion, you should contact an attorney and take his opinion in this regard. He would be the best person to give you an advice is this issue.

Feel free to ask if you've further queries.

Sussane
Posted on: 06th Sep, 2009 08:52 pm
We filed a chapter 7 bankruptcy 2 years ago but we kept our home. All the statements from the bank for the home loan come from the bankruptcy department. If we faulted on the loan now and it foreclosed what happens to the difference in the money owed from what they sell it for.
Posted on: 10th Sep, 2009 03:10 pm
I have two properties. One property has my house with mortgage and the other prop has my inlaws with no mortgage. The land which houses my in-laws is classified as a relative homestead. Does bankruptcy protect both props?
Posted on: 10th Sep, 2009 06:52 pm
Hi,

To dkaa,

If you reaffirmed the loan during your bankruptcy proceedings, then you are personally liable for the loan. In such a situation if you default the loan and your property is foreclosed upon, you would be liable for the deficient amount.

To kdv,

As the second property has relative homestead, I do not think, it would be protected in bankruptcy. However, laws may vary from state to state. You should contact an attorney and check out his opinion in this case.

Thanks
Posted on: 10th Sep, 2009 10:22 pm
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