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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
Concerning the sale of an ATV. A lender only has a ucc on a ATV not a title. They are not able to tell without going legal if the unit was sold. It can cost thousands to find out he has sold it. Then even more to get a judgement. not a simple legal system is it. Doesnt protect the lender without him incurring a high cost.
Posted on: 20th Feb, 2009 12:36 pm
Hi there…I hope someone out there can help me as I'm totally confused. I'm in upside down with all my debts and just want to get out of it…So we decided that I would file bankruptcy. But a lot of people telling me about the Means Test. What is it and how does work? And what if I don't pass the Means Test? Can't I file bankruptcy?
Posted on: 03rd Mar, 2009 02:54 am
hi guest,

i guess you are planning to file chapter 7 bankruptcy. the means test is an important part of bankruptcy and if you do not qualify, you will not be able to file bankruptcy. in the means test, your monthly expenses are deducted from your present monthly income in order to arrive at a monthly disposable income. if your disposable income is higher, then your chances of qualifying for chapter 7 will be lowered.

when you go for the means test, you will have to determine whether your income is more or less than the median income in your state. if your income is more than the state median, then you must figure out whether you would have enough left over after subtracting your expenses so that you can repay some of your debt.

if you don't pass the means test, then you will not be able to file chapter 7. in that case, you can file chapter 13 bankruptcy. in this case, you will have to make monthly payments over a five-year period according to a plan given by the lender and monitored by the court.

take care.
Posted on: 03rd Mar, 2009 03:06 am
how long will it take for chapter 7 bankruptcy to go through i mean once i file
Posted on: 03rd Mar, 2009 05:01 pm
In filing for Chapter 7 bankruptcy do I have to list my social security income as an asset? In other words, is it part of the calculation of my total income or is it ignored both when taking the means test and in the filing process? I know it can't be attached but does it have to be part of the overall calculation?
Posted on: 03rd Mar, 2009 05:22 pm
Hi,

To kimknows!

As far as I know, you will receive a discharge order within 4 months of filing the bankruptcy.

To red beach!

As far as I know, you will have to list your social security as an asset. After including your social security as your asset, if you do not qualify in the means test, then you will have to go for Chapter 13.

Sussane
Posted on: 03rd Mar, 2009 09:55 pm
I am needing to file Chapter 7 Bankrupcy and will need to make a withdrawal from my 401K plan to help pay attorney and court fees for Bankrupcy filing. I have made some withdrawals the past year just to live as my only income is Social Security and part time work of 20 hours per week, I also have a current pension that has a ten year payout expiring in May of 2009. Is the 401K plan completely exempt regardless of my age of 65 in May, and my ability to make a legal withdrawal. because I am over 59 1/2 years old. Also I am currently being garnished causing much hardship. how soon do the garnishments start once bankrupcy is filed? I am a resident of the state of Missouri.
Posted on: 05th Mar, 2009 09:22 pm
Can I file chapter 7 if I owned a home? The home has little value!!
Help????
Posted on: 07th Mar, 2009 06:28 pm
Hi,

To Susan,

You will not have to pay penalty for 401k withdrawal as your are already 59 and 1/2 years old. However, you may have to pay taxes on that. Once the bankruptcy is filed, the court will issue an automatic stay and the creditors will not be able to garnish you wages further.

To homeowner,

You will be able to file a Chapter 7 bankruptcy provided if you qualify the Means Test. If you don't qualify the means test, then you will have to go for Chapter 13 bankruptcy. To know more about means test, check out the following link:
http://www.mortgagefit.com/bankruptcy/chapter7-2.html#80312

Sussane
Posted on: 08th Mar, 2009 10:22 pm
i have i used my credit cards within the last few months but need to file bankruptcy as i am unable to pay my bills on my own. how long do i have to wait until i can apply for a bankruptcy? also, i do not own anything, and do not pay rent. Will i still qualify? i made less then 10k last year.
Posted on: 13th Mar, 2009 10:02 am
In order to file Chapter 7 bankruptcy, you will have to qualify the Means Test. To know what Means Test is, check out Sara's post above. If you qualify the Means Test, you will be able to file Chapter 7 bankruptcy. If you don't qualify the Means Test, then you will have to file Chapter 13.
Posted on: 13th Mar, 2009 11:22 pm
i have my car title at a title place if i file chapter 7 can they reposses my car or can that be included in a 7 so i keep my car
Posted on: 23rd Mar, 2009 11:42 am
I am getting a divorce we just got dismissed from a chapter 13 I would like to file chapter 7 on my own after the divorce the chapter 13 was in my husbands name
Posted on: 23rd Mar, 2009 05:01 pm
Hi!

To jc,

Your car can be considered as an asset and the bankruptcy trustee can liquidate it to pay off your creditors.

To jmack,

Yes, you will be able to file Chapter 7 bankruptcy after your divorce. However, you would have to qualify the Means Test in order to file Chapter 7.

Sussane
Posted on: 23rd Mar, 2009 09:45 pm
Hi

Since chapter 13 was in your husband's name, you can surely file a chapter 7 after divorce, subject to your qualification in the means test and fulfilling other criteria as required by the bankruptcy laws, 2005.
Posted on: 26th Mar, 2009 07:04 am
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