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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
Hi Sid,

You haven't mentioned whether your wife has joint debts with you or not. However, if you do not have joint debts with your spouse, then her credit will not be affected. She may even take a loan in order to purchase another property. But if there are any joint debts, then your bankruptcy will appear on her credit report as well. It will affect her credit score also.

Thanks.
Posted on: 16th Jan, 2009 04:54 am
2 weeks after filing for chapter 7 my mother-in -law passed away. My husband is getting $5,000 from her IRA. Is this exempt in Ohio from the Trustee taking it from us?
Posted on: 16th Jan, 2009 04:45 pm
I think, as your husband have inherited it after his mother has passed away, it will be exempted and the trustee will not be able to claim from you. Better consult a lawyer in this regard.
Posted on: 16th Jan, 2009 10:51 pm
i'm pretty confused regarding my plans of filing bankruptcy…i will be filing chapter 7 if that helps. i have heard that collectors can force me to dispose of property other than my house and one vehicle and other allowable goods or belongings. but i do not find the law stated clearly as to who will be made responsible for the disposal or what can they really take... what can they really take if i file for ch7? will it do me any good if i sell off my property now and pay off the debts of the collectors? also my wife's name is not on the mortgage and property…so will her credit be ruined or will the collectors take her things??? we are planning to buy a property later on depending upon her credit and income so will my declaring bankruptcy prevent her from buying a home or car in the future?
Posted on: 20th Jan, 2009 01:41 am
Hi Peet,

In case of chapter 7 bankruptcy, the trustee generally liquidates your property in order to pay off the creditors. To know about what assets are included in the chapter 7 bankruptcy, check out the given link:
http://www.mortgagefit.com/bankruptcy/chapter7.html#assets

Moreover, you should also note that you may be able to save your property if you can afford to reaffirm your mortgage debts once you are discharged from Chapter 7 bankruptcy.

As you have mentioned that your wife's name is not on the property deed neither on the mortgage, then her credit will not be affected neither will the bankruptcy trustee has the right to take away her properties. As you are filing bankruptcy, it will not prevent her from getting a mortgage or a car loan. The lender will check her credit report and income history while approving a loan to her.

Thanks,

Jerry
Posted on: 20th Jan, 2009 02:08 am
my spouse and I filed a chapter 7 in sept of 08. We recived a discharge with an approved Order Approving Trustees report of no distribution and closing estate. All final and signed by the judge. How will this affect the filing of my tax return in Feb of 09. Can they take it?
Posted on: 22nd Jan, 2009 09:53 am
Tax refunds or a portion of it are considered as a part of the debtor’s assets and are taken up by the trustee to pay your creditors. However, there are exemptions on them and it differs from state to state. But as your bankruptcy has been discharged, I don’t think they should claim the refunds from you.
Posted on: 23rd Jan, 2009 01:48 am
I bought a friend an auto for $4,000 without listing a lien on the title. The individual filed Chapter 7, Federal court 3 months later, Dec, 2008 in Michigan . He was told his home with a mortgage lien is protected n(equity $10,000) but his auto is not without a lien. I understand there is a $2500 federal auto exemption- should this amount not apply to reduce his liability? The vehicle may only be worth $3000 now to further reduce the bancrupcy trustee's claim. PJC
Posted on: 26th Jan, 2009 07:43 am
Yes, he should get the $2500 federal auto exemption and this should reduce his liability.
Posted on: 26th Jan, 2009 10:29 pm
Hello community!... I'm in some serious mess and would like to ask some questions…Just hope someone can answer them. There's a lien on my property. Right now, I'm also planning to file bankruptcy as well. So my question is…Will my filing bankruptcy remove the lien from my property??? Or does the lien still remains on the property forever??? There's another question for you guys as well… I am divorced and live in community property state so my question goes… will this bankruptcy filing of mine wipe my community debts as well? I hope someone soon answers my question…Sorry for being long winded…but can't help it…I'm in desperate need of help…
Posted on: 30th Jan, 2009 02:33 am
Hi Guest,

As far as I know, under some conditions, you may be able to file a special motion to remove some of your liens. The creditors will not remove the lien from the property until they get an order from the bankruptcy court to remove them. You will have to consult your bankruptcy attorney and check if you can file the special motion for removing the liens.

As far as the question regarding the community debts are concerned, you can be discharged from all the community debts which are dis-chargeable according to bankruptcy law. But remember that if you are discharged from the community debts, then it makes your ex-spouse liable for the entire debt.

Thanks,

Jerry
Posted on: 30th Jan, 2009 02:43 am
i did not have the funds to pay for my court fee installments and I have a dismissal hearing coming up. The trustee took my tax return which is the only thing i was counting on to pay my rent...so it comes down to bankruptcy or a place to live...will my 09 refund be returned to me in the case of my dismissal?
Posted on: 07th Feb, 2009 11:12 am
I guess the refund should be returned to you after the dismissal.
Posted on: 08th Feb, 2009 07:16 am
The debtor never finished paying for the ATV 1128.38, I have a valid UCC filing, I dont know if he even still has the ATV or if he sold it and chose not to pay it off. Can a debt that was Sold out of Trust SOT be discharged. How can I find out if he still has the ATV. (1200 miles away) :?:
Posted on: 16th Feb, 2009 12:43 pm
I think you should contact your lender and get the information from him. The lender is the best person to tell you whether he has sold the ATV or not.
Posted on: 17th Feb, 2009 02:39 am
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