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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 guest

I am so sorry to hear about the hospitalization of your daughters. I pray to God that they get well soon.

As far as credit card debts are concerned, you can definitely file bankruptcy to come out of it. Yes, consulting a bankruptcy attorney will be the best thing before filing it. The attorney will help you in knowing the pros and cons of filing bankruptcy.

However, in my opinion, filing bankruptcy should be the last option for you. You can try for a debt settlement in this situation. This will help you in reducing your credit card payments by 40%-60% depending upon your situation. You can contact any debt settlement company and check out their plans. I hope it'll help you.

Thanks.
Posted on: 16th Apr, 2009 01:49 am
Well…hope anyone can help me with an answer. I had lost my job and I left USA a year back. Few months back, my house went through a sale but I didn’t make much money from the sale. Presently, I have only $20K in a bank account in US. But I don’t have any other property in USA. However, right now, my credit card payments are now defaulted. I was advised to file chapter 7 to avoid any arrest warrant during future immigration. I have decided that I would file bankruptcy. However, I want to know whether I will have to be physically present in California to complete the process? Can't my lawyer to do all the job?
Posted on: 28th Apr, 2009 02:42 am
Hi Sheryl,

As far as I know, your lawyer will not be able to do the entire job alone. You will have to be present at the 341 meeting yourself.

You have stated that you are filing the bankruptcy only to get out of the credit card debts. Rather than filing bankruptcy, I would suggest you to go for debt settlement. This will help you in paying off your credit card debts by taking help of settlement companies. The debt settlement company will negotiate with creditors thereby reducing your outstanding balance by 40%-60%. Thus, you can save good amount of dollars as well.

Thanks
Posted on: 28th Apr, 2009 03:14 am
If I go BK, Chapter 7, What effects will it have on my savings and small check account that I have. Will the BK Court order to have this money out to partially pay my creditors?

Anonimous
Posted on: 28th Apr, 2009 10:35 am
As far as I know, when you file Chapter 7, you can keep $4,000 in your savings account. Anything more than that will be taken by the court to pay your bills.
Posted on: 29th Apr, 2009 12:02 am
My husband is filling for chapter 7 the lawyer has asked for my information why? If he's filling single my home is under my name and my cars as well can someone let me know if this will affect me in any way???? We live in NY
Posted on: 04th May, 2009 09:30 am
hello, my wife and i filed chapter 7 in 1998. I believe I would be able to file again (not that I want to). We bought a house in 2004 and since a year after I have been laid off several jobs. We tried to keep the house several times with remods. we are now at a point where we are 7 months behind. We owe several credit cards. Didnt really want to go back into CH7 but looks that way. Should we include the house or try and settle it with the bank for a short sale? How will have BK and foreclosure affect us in the future? Thanks so much!
Posted on: 04th May, 2009 09:58 am
I HAVE ASSETS OF 14000.00 IN CASH WITH 50,000.00 IN CREDIT CARD DEBT. IS IT POSSIBLE TO SAVE THE 14000.00 I HAVE FROM BEING TAKEN. IM ON DISABILITY. CAN I FILE FOR BANKRUTCY?
Posted on: 04th May, 2009 10:07 am
hi,

to desperate,

if your husband is filing alone, then you should not worry about your credit. however, you can contact an attorney and get his opinion on this issue also.

to crisis,

it would be better if you could immediately speak to your lender about the option of short sale. this will also save you from filing bankruptcy. however, you should note that, if you go for the short sale, you'll be responsible for the deficient amount.

as far as your credit card debts are concerned, you can go for a debt settlement. you can contact any debt settlement company and check out their programs. this will help you in reducing your debts by 40%-60%.

to warren,

as far as i know, you'll be able to file bankruptcy. however, i would suggest you to contact a bankruptcy attorney and discuss your options with him.

thanks
Posted on: 04th May, 2009 10:02 pm
I'm in a worse situation. It will be great if someone of you can help me…My wife was serious ill few years ago and we had incurred a lot of medical bills. However, we had a dream to buy our new home and thus got one. I knew that the post-transplant treatment would be expensive but though that it would be taken care by the insurance. But now things have gone for the worst and we have ended up with more than $10,000 in medical bills. Apart from this, we also have some credit card debt around $75,000. Though the insurance is taking care of some of our debts, we are behind on our credit card payments and mortgage. I guess I make too much money to qualify for a Chapter 7 and my wife brings about $1000 a month in disability. We always had good credit and now have numerous 30- and 60-day delinquencies. We would appreciate your advice whether we could qualify for Chapter 7 or Chapter 13.
Posted on: 06th May, 2009 02:07 am
hi guest,

you haven't mentioned your income but you have stated that you do not qualify for chapter 7 bankruptcy. i would suggest you to contact a bankruptcy attorney and take his opinion in this regard. you can ask your bankruptcy attorney to go for a detailed review of your situation and tell you about the suitable options. this will let you know whether you qualify for chapter 7 bankruptcy or not.

if you do not qualify for chapter 7, then you'll definitely qualify for chapter 13 bankruptcy. after your bankruptcy is discharged, you would get a three- to five-year repayment plan with the court. the payment will depend upon your financial situation. apart from this, the credit cards debts and the medical bills will be eliminated after you complete the chapter 13 repayment plan.

take care.
Posted on: 06th May, 2009 02:39 am
Hello everyone… I must say there are lots of informative posts in the forum. I would like you all to answer one of my queries…I'm planning to file Chapter 7. I have heard that the bankruptcy trustee will call back payments made to the creditors in the previous 90 days. Is it true???
Posted on: 08th May, 2009 03:06 am
Hi Myera

The bankruptcy code allows a trustee to recover payments made to creditors shortly before you file bankruptcy. The court may feel that you are giving preference to some of your creditors if you pay them as compared to your other creditors. Your bankruptcy trustee is allowed to take back such payments from a creditor and place the money in your general estate. All your creditors will then receive equal payments from your general estate based on their priority.

However, you should note that your trustee will not recover payments which you made to your secured creditors such as mortgage company. But again, this is not a rule so some trustees recover anything they can. It should also be noted that your trustee will look for the payments you made to your family members. The trustee can look back one year to recover this type of payment.

Thanks.
Posted on: 08th May, 2009 03:16 am
I currently lost my job and had to rollover 12k into an IRA., but now I am having trouble paying extra bills. I own nothing. I do have a car, but I have a loan on it. I am still on unemployment at this time. If I file Chapter 7, will I lose my retirement?
Posted on: 09th May, 2009 05:14 am
Hi Guest,

As far as I know, in most of the states, the retirement accounts are protected though you file bankruptcy. You will have to speak to your bankruptcy attorney and check out what you state laws are.
Posted on: 10th May, 2009 10:39 pm
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