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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
not sure what to do. Tried to start a business 4 yrs ago and took out a home equity line of credit. We used 86,000 of it. We have only been paying the interest because that is all we can afford. We have around 85,000 in credit card debt. We were told we probably wouldn't be able to turn our helc into a mortgage because we only make 40,000 and we have 3 children. We don't know what to do. We own two cars that are paid for. If we file ch.7 will we loose our home? After monthly expenses we don't even have money for gas or food. Desparetly need some advice
Posted on: 23rd Feb, 2011 12:24 pm
I went through 2 brain surgeries and a spinal cord surgery and now I am on disability. I have 4 children. There is not a spouse although I do recieve child suport. My total income is around 2,100 monthly. I owe 100,000 or more in medical bills can I file bankrupsy?
Posted on: 23rd Feb, 2011 01:03 pm
Hi anonymous,

You can file Chapter 7, include both the mortgages in it and still save your home. However, in order to do so, you will have to reaffirm both the mortgages with your lender. Once you reaffirm the loan, you'll become personally liable for the payments.

To davie,

If you file Chapter 7, you will be able to get the unsecured debts discharged. If you wish to keep your home, then you will have to reaffirm the loan. If you don't reaffirm the loan, then you won't be personally liable for the loan. Thus, it will become difficult for you to pay off the loan.

To Carie,

You will be able to file bankruptcy. I will suggest you to contact a bankruptcy attorney and take his opinion in order to know which chapter of bankruptcy filing will be best suited for you.

Thanks
Posted on: 23rd Feb, 2011 11:08 pm
i got a discharge on my second mortage from a chapter 7 does this mean i still have to make payments to them?
Posted on: 10th Mar, 2011 09:04 am
You're not personally liable for making the payments as your mortgage has been discharged in your Chapter 7 filing.
Posted on: 11th Mar, 2011 01:24 am
how soon after filing bankruptcy can you cash out your 401k in indiana?
Posted on: 11th Mar, 2011 08:08 am
Hi Guest,

Your 401k plan is protected under the bankruptcy filing as it is your retirement savings. You should cash out your 401k account after you receive a discharge from your bankruptcy filing.
Posted on: 13th Mar, 2011 11:31 pm
If my husband and I have paid everything on time, and have good references, what are our chances of getting a FHA loan after two years of receiving a Chapter 7 bankruptcy discharge?
Posted on: 16th Mar, 2011 08:02 am
What happens if I file bankruptcy but they want to take my home due to back property taxes?
Posted on: 16th Mar, 2011 11:06 pm
Hi rhea,

You will be able to qualify for a FHA loan after 2 years of Chapter 7 bankruptcy discharge. You should contact the local FHA lenders and they will go through your financial situation and credit report to let you know whether or not you can get a loan. In order to get a FHA loan, you should have a credit score of 620.

Welcome Skm,

Back taxes do not get discharged in bankruptcy filing. Thus, after your bankruptcy filing is discharged, they can sell off your home in order to recover the delinquent property taxes.
Posted on: 17th Mar, 2011 12:12 am
my paycheck was deposited early on the 24th of this month instead of the regular payday the 25th without my knowledge. I filed chapter 7 on the 24th will the trustee get that money if I can show that I used it to pay bills? My paystub says the 25th? weird I know..
Posted on: 28th Mar, 2011 03:09 pm
Hi anonymous!

Welcome to forums!

Your trustee can claim the money that was deposited in your account. However, if you're able to prove the fact that you paid your bills, then the trustee may consider your case.

Feel free to ask if you've further queries.

Sussane
Posted on: 29th Mar, 2011 12:00 am
My husband and I filed for bankruptcy in 2003 and the trustee discharged it as paid in 2006. We had two home equity loans which were three months behind. The catch up payments were included in the bankruptcy repayment plan and we continued to keep payments up to date until the current time. I just inquired about a payoff for the larger loan and I received a response that we owe 7,000 on the loan but another 8,200 for interest during the years 2003 - 2006. I'm confused on whether this is a legal charge since we made all the payments. They are charging 3 years of interest when the payments were never lowered, we paid the full amount each month. Thank you for your help.
Posted on: 03rd Apr, 2011 07:58 am
Hi Hamill,

You should contact your lender and ask him to clarify the whole matter. It is the lender who will be able to let you know why they are charging you the extra dollars when you've made the payments on time.

Thanks
Posted on: 04th Apr, 2011 12:13 am
If my father is a cosigner on my mortgage and I file chapter 7 bankruptcy, will he find out about it? I FULLY intend on paying my mortgage as usual. I was never late on any payments and plan to keep it that way
Posted on: 06th Apr, 2011 03:31 pm
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