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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
After filing chapter 7, I'm wondering how much of my tax refund can be taken, and what determines that amount. Thanks!
Posted on: 07th Feb, 2011 07:57 am
i plan to file bankruptcy & want to know if the creditors can attach my ssdi income. and how do i get the creditors off my back?how do i get the creditors off my back prior to filing bankruptcy? i cannot pay them. i need to get the creditors off my back prior to filing bankruptcy.
Posted on: 07th Feb, 2011 04:04 pm
Hi!

Welcome to forums!

To Laela,

The trustee can take away the total amount that you receive as tax refund and use it to pay off your creditors.

To wiebewart,

Your social security income is exempt of garnishment. In such a situation, the bankruptcy trustee won't be able to come after that income. Creditors won't leave you unless you file bankruptcy.

Feel free to ask if you've further queries.

Sussane
Posted on: 07th Feb, 2011 11:20 pm
If I have to give up my home with a mortgage during chapter 7 bankruptcy, would I have to pay anything back or is it also wiped clean.
Posted on: 09th Feb, 2011 03:22 pm
Hi Jessica, I borrowed $10,000.00 from a friend in 2006 to purchase a truck and she had me sign a promissory note which was notarized. In April 2010, I sold the truck and re payed the loan on May 2010. Its now February 2011 and I am about to file chapter 7. Is it possible for the creditors to go after my friend for that $10,000.00?
Thank You
Posted on: 09th Feb, 2011 04:57 pm
Hi anonymous,

If you don't reaffirm your mortgage, you won't be personally liable for paying anything to the lender.

To anonymous,

Your creditors won't go after your friend as your friend was also one of your creditors and you've paid her off.
Posted on: 09th Feb, 2011 10:50 pm
my husband filed bankruptcy in 07/07/2009. He has a va loan for a home that we are tring to purchase, can the mortage people denie us this loan? Because its been 18 months.
Posted on: 11th Feb, 2011 07:21 am
I filed chapter 7 two years ago. My mother is wanting to give me her house she lives in. Can my previous creditors come after me if I get the house.
Posted on: 11th Feb, 2011 09:58 am
Hi Henry,

Immediately after a bankruptcy filing, none of the lenders will be ready to give you a loan. Depending upon the chapter of bankruptcy you filed, you'll have to wait for 2-4 years.

To Guest,

Your previous creditors won't be able to come after you in order to recover their dues as the debts have been discharged 2 years back in your bankruptcy filing.

Thanks
Posted on: 11th Feb, 2011 10:12 pm
hello, me and my husband filed for chapter7 and it was granted, this is the first time we are going to file for taxes, while being under bankrupcy. We can still get a full refund right?
Posted on: 14th Feb, 2011 03:18 pm
Hi da1nonlyj!

Welcome to forums!

You will get your full refund when you file your taxes. However, you may have to surrender the tax refunds to your trustee so that he or she can use the money to pay off your creditors.

Feel free to ask if you've further queries.

Sussane
Posted on: 14th Feb, 2011 10:29 pm
i filed for chapter 7 and i have a home equity loan plus my mortgage loan,
would the home equity have been included in my bankruptcy. they do have a lien against my home. i have been paying both payments. the bank that had my home equity loan sold me to another bank about the same time i filed for bankrupcy and they will not send me a monthly bill or tell me my balance so i thought maybe i don't have to pay this.
much i owe. so i wondering if this was included in my
Posted on: 15th Feb, 2011 12:35 pm
I filed for chapter 7 and i have a home equity loan plus my mortgage loan,
Would the home equity have been included in my bankruptcy. They do have a lien against my home. I have been paying both payments. The bank that had my home equity loan sold me to another bank about the same time I filed for bankrupcy and they will not send me a monthly bill or tell me my balance so I thought maybe I don't have to pay this.
much I owe. So I wondering if this was included in my
Posted on: 15th Feb, 2011 12:36 pm
I filed for chapter 7 and i have a home equity loan plus my mortgage loan,
Would the home equity have been included in my bankruptcy. They do have a lien against my home. I have been paying both payments. The bank that had my home equity loan sold me to another bank about the same time I filed for bankrupcy and they will not send me a monthly bill or tell me my balance so I thought maybe I don't have to pay this.
much I owe. So I wondering if this was included in my
Posted on: 15th Feb, 2011 12:37 pm
I filed for chapter 7 and i have a home equity loan plus my mortgage loan,
Would the home equity have been included in my bankruptcy. They do have a lien against my home. I have been paying both payments. The bank that had my home equity loan sold me to another bank about the same time I filed for bankrupcy and they will not send me a monthly bill or tell me my balance so I thought maybe I don't have to pay this.
much I owe. So I wondering if this was included in my
Posted on: 15th Feb, 2011 12:38 pm
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