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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 harley,

You will be able to include your home equity loan in your bankruptcy filing and get the loan discharged. You can contact your bankruptcy attorney and he will let you know whether or not the loan was included in your bankruptcy filing.

Thanks
Posted on: 15th Feb, 2011 11:03 pm
I borrowed against my 401K 3 years ago and was laid off so now it became a distribution of which we owe the IRS about $150,000 in taxes. My husband was laid off as well but he found a job that pays him less than what he was making. We own 3 houses of which 2 are underwater. The IRS has liens against all 3 and want to file bankruptcy, not to eliminate the taxes, but to get out of all our credit card debt. The only property that has some equity in it is worth about $385,000. After paying 6% commission, minus what we owe it isn't enough to pay the IRS or any of our creditors. A lawyer told us because we have equity in this property, we don't qualify for Chapter 7 or 13. Now what???
Posted on: 16th Feb, 2011 03:33 pm
I am planning on starting the process next week for a Chapter 7 bankruptcy. Am I able to include my 5 cash advances that I am making payments on in the Chapter 7. 2 are over 60 days old and 3 are less than 60 days old. I changed my checking account on my attorney's advice so that none of the cash advance companies can touch my social security disability check and my bank account. I live in New Mexico. Please send me your reply.
Posted on: 16th Feb, 2011 07:29 pm
hey does bankruptcy cover hospital bills also
Posted on: 16th Feb, 2011 08:47 pm
Hi!

Welcome to forums!

To Guest,

I haven't heard of any such rule that if you have equity in your property, you won't be able to qualify for Chapter 7 or Chapter 13. I will suggest you to contact a good bankruptcy lawyer and take his help in this matter.

To Diamond,

You can include your payday loans in your bankruptcy filing and get them discharged. You should have a word with your bankruptcy attorney and he will let you know about the formalities.

To Guest,

As far as I know, hospital bills can be included in your bankruptcy filing.

Feel free to ask if you've further queries.

Sussane
Posted on: 16th Feb, 2011 10:15 pm
Hello,

A friend of mine had filed bankrupcy in 2005. Six days before he filed he had taken #300.00 cash from those quick cash places. Today, 02/17/2011, 6 years later he received a phone call from a person saying that he has to pay the $300.00 back, otherwise they are going to sue him. Is that possible, for them to come after so long and ask for the money. They were saying that because he took the cash just six days before he filed the bankrupcy it is considered fraud. If he doesn't pay the money, they are going to send him a suppina to appear in cort?
Please help
Posted on: 17th Feb, 2011 12:10 pm
What happens with the payments I have been making each month to my sister for a personal loan from her. I have been paying her $150/mo. for a year on a $7500 loan. There was no collateral involved.
Posted on: 17th Feb, 2011 04:41 pm
Welcome anonymous,

If the payday loan has been discharged in his bankruptcy filing, he won't be liable to pay it. However, it is better to consult an attorney and take his opinion in this matter.

Hi stevendbayer,

Do you want to include it in your bankruptcy filing? Your query is not clear to me. Can you explain it, please?
Posted on: 18th Feb, 2011 01:14 am
if i file a chapter 7 but want to keep my house but iam behind on my payments how will that affect me?
Posted on: 18th Feb, 2011 10:04 am
we are letting our vehicle go back but we need to replace it with a another.
we have enough cash from out income tax to pay for one but we don't know if we can do that or if the trustee can take if we do. we filed chapter 7 in dec. and have went to our 341 meeting but have not been discharged yet. please help me understand what we need to do.
Posted on: 19th Feb, 2011 06:16 am
We have been discharge for over a year, maybe two. Now we struggle with the mortgage and the banks won't help us. We did not include the house mortgage in the bankruptcy. Can we go back and add it? Do we have certain rights?
Posted on: 19th Feb, 2011 10:18 am
Hi squirrel,

You will have to reaffirm the mortgage if you want to keep the property. Reaffirming the mortgage and paying off the dues on time will help you in saving the property.

To Guest,

As your bankruptcy filing has not been discharged yet, it won't be a good idea to buy a car now. You should wait till your bankruptcy filing gets discharged and then apply for a car loan.

To anonymousTg,

It will be difficult for you to include your mortgage in the bankruptcy now. Nevertheless, you should have a word with your bankruptcy attorney and take his opinion in this matter.

Thanks
Posted on: 20th Feb, 2011 11:27 pm
my family and I are renting a home that is under bankruptcy from my fiance's grandmother, the home is under bankruptcy is she legally allowed to collect rent from us?
Posted on: 22nd Feb, 2011 01:03 pm
Hi Shannon!

Welcome to forums!

A query similar to yours has been replied to in the given page:
http://www.mortgagefit.com/predeal/about49851.html

Take a look at it. Hope it helps you.

Sussane
Posted on: 22nd Feb, 2011 10:33 pm
CAN I FILE CHAPTER 7 IF I HAVE TWO MORTGAGES AND WANT TO KEEP THEM BOTH MY PARENTS LIVE IN ONE OF THE HOMES iM UPSIDE DOWN ON BOTH HOUSES AS FAR AS EQUITY.
Posted on: 23rd Feb, 2011 08:10 am
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