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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
I have no home, my car is 10 years old, I am on SSI (&1,000.00) a month my only income. I do have about $19,000.00 in some mutual funds. I owe over &100,000.00 in cerdit cards acounts. If I file chapter 7, can they take what I have felt in the mutual funds??
Posted on: 26th Mar, 2009 10:32 am
As far as I know, mutual funds are not exempt. So the bankruptcy trustee may utilize them to pay off your debts. I think you should contact a bankruptcy attorney and get his opinion on this issue.
Posted on: 26th Mar, 2009 11:08 pm
Well, it's a messy situation…I filed chapter 7 a few days ago. Immediately, I informed the bank about the bankruptcy and also gave them my case number. But surprisingly, the repo guy just showed up today. He wants me to open my garage so that he takes my car. I informed him about my Bankruptcy and showed him about case filing paper and he said he still wanted the car. I did not bother and asked him to leave and slammed the door on his face. But he is parked down the street now :(.

What recourse do I have against the bank for this?
Posted on: 31st Mar, 2009 02:40 am
Hi Guest,

I think you should contact your bankruptcy attorney asap and ask him to deal with the bank. In my opinion, your lender is violating the automatic stay. It would be better if your bankruptcy attorney can send a certified letter to the bank indicating that they are violating the court automatic stay. However, you should note that the lender can file a motion to lift the automatic stay. If the automatic stay is lifted then they can take the car but until then they can't legally take it.

Take Care.
Posted on: 31st Mar, 2009 03:09 am
Hey guys…I would like to have your opinion regarding my situation. The only debt that I have is the home payment. My vehicles are paid for and no credit card debt. The property is in my name. Husband is a disabled veteran. I'm having a tough time paying mortgage. Credit score was quite high when I purchased property. I had planned to sell my house and take the equity to buy a small and less exoensive home. Now the realestate market has gone for a toss and my payoff is almost equal to what i owe. There's no equity :(. What do you say…should i file chapter 7 Do you think it's a good idea???
Posted on: 08th Apr, 2009 03:26 am
Hi jp,

I don't think you should file Chapter 7 bankruptcy. It should be the last option that you should go for. If you are delinquent on your mortgage payments, you should contact your lender first. If you are interested to save the property, you can apply for a loan modification. Depending upon your financial situation, the lender would accept or reject your request.

If you are not interested to save the property, then you can apply for a deed in lieu of foreclosure. If the lender accepts this process, he will sell off the property and recover the debts. The deficient amount resulting from the sale of the property will be forgiven.

Take care.
Posted on: 08th Apr, 2009 03:48 am
i am 10 shy of the deadline for creditors to object to my bankruptcy. If I cash out my 401k after that deadline can I get into trouble? What happens?? Thanks
Posted on: 08th Apr, 2009 10:12 pm
Hi Pecas,

Cashing in 401k can be very expensive. It will cost you 30-40 percent tax and 10 percent penalty. Apart from this, if you cash out 401k, you will have to pay federal and state tax. You will also owe a 10% early withdrawal penalty if you are under 55 when you leave your job and withdraw the money.

Why do you think your creditors will object to your bankruptcy?
Posted on: 09th Apr, 2009 03:31 am
can a property lien be included in a chapter 7?
Posted on: 09th Apr, 2009 08:33 am
Welcome smlasp,

If you are speaking of mortgage lien, well, you can include them in your bankruptcy. The personal liability of paying the mortgage is discharged but as it is secured by a collateral, the mortgage remains as a lien on the real property after a bankruptcy discharge.
Posted on: 09th Apr, 2009 09:15 pm
hi there…need some help to take a decision. i have some credit card debts and thus i was planning to file chapter 7 bankruptcy. let me tell you that i don't have any assets that exceed the allowed exemptions. do you think that debt settlement is a good option as compared to filing bankruptcy? there were few people who were telling me that debt settlement does not always work. what do you think…should i go for debt settlement?
Posted on: 11th Apr, 2009 01:42 am
Hi Guest

I think you are planning to file Chapter 7 bankruptcy only for the credit card debts. In that case, debt settlement or debt consolidation can be a good option for you. Debt settlement is a process through which debt settlement companies will negotiate with the creditors and reduce your outstanding balance by 40%-60%. Debt consolidation, on the other hand, will help you in reducing your interest rates for paying off the credit card debts.

In my opinion, debt settlement will be a good option for you.

Thanks.
Posted on: 11th Apr, 2009 02:08 am
I HAVE A LEASE ON AN EXCAVATOR THAT COST US 70K BUT WE OWE 5K, POSSIBLE TO KEEP AFTER FILING PERSONAL AND CORPORATE CH. 7
Posted on: 14th Apr, 2009 02:07 pm
Hi Guest,

It will depend upon the fact whether it would be considered as your exempt property or not. You need to discuss your options with your bankruptcy attorney.
Posted on: 15th Apr, 2009 01:22 am
We are planning to file bankruptcy. Let me explain the scenario a little bit…It’s bad to hear but we have a lot of credit card debts. This is because I lost my job last November. I wanted to keep the house in order and wanted that my kids to have a decent living…thus, I neglected the credit cards. You can understand that it’s the house which is more important to me than those credit cards. Well… in the present times… all those credit card accounts are in collection and I don’t think I’ll be able to pay off. The worst part is that 3 of our daughters were hospitalized for a week and thus the medical bills added up quickly. Do you think we should file bankruptcy? Do we need a lawyer and what steps do we take first?
Posted on: 16th Apr, 2009 01:25 am
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