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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
is my personal injury annuity exempt from chapter 7 bankruptcy trustee
Posted on: 15th Nov, 2011 11:46 am
Hi autumn!

Welcome to forums!

As far as I know, the personal injury annuity can be taken away by the bankruptcy trustee .

Sussane
Posted on: 15th Nov, 2011 09:15 pm
Bankruptcy question, chap 7. Refinanced home in my name only. Wife is not on mortgage. Filing chap 7 jointly as most credit cards are in our name. Are we allowed 20k exemption on home because filing joint or 10k because wife is not on mortgage? State is GA
Posted on: 07th Jan, 2012 10:08 am
Hi Breck,

As far as I know, you may be able to qualify for an exemption of $20,000 if married, and the property is solely owned by one spouse in the state of GA.

Thanks
Posted on: 08th Jan, 2012 11:37 pm
i filed for chapter 7 and went to the 341 meeting. th trustee said we have to turn over ore tax return when filed.what if you don't have to file due to not making enough money.do i still have to file?is this the only return he can take or can he take prior years also?
Posted on: 15th Jan, 2012 09:15 am
As far as I know, the bankruptcy attorney won't be able to take the tax returns of the prior years. As far as filing taxes are concerned, it will be better if you could contact a tax adviser and take his opinion in this matter.
Posted on: 16th Jan, 2012 01:55 am
If i have a sucured installment loan on jewerly and gave these as christmas presents and i cant give them back do i still have to pay the debt? Can they force me to pay? Or can they do a modified payoff and modified payments? :(
Posted on: 21st Jan, 2012 09:48 am
You will be liable for paying off the loan. They will force you to pay off the loan. As you have used the jewelry as a collateral, then they will take away the jewelry in order to recover the debts. You can negotiate for a modified pay off but it will depend upon the lender whether or not he will agree to it.
Posted on: 23rd Jan, 2012 02:02 am
I have two mortgages. I'm going to be filing chapter 7. Will I be able to get rid of the lesser of the two mortgages on my home? Also, after I file chapter 7, will I be able to get on the making home affordable program?
Posted on: 24th Jan, 2012 08:00 pm
Hi Guest,

You can get a discharge from both the loans provided you don't reaffirm the loan when you're in bankruptcy filing. Unless you reaffirm the loan, you may not qualify for home affordable program.

Thanks
Posted on: 25th Jan, 2012 12:49 am
i received a bankruptcy discharge in august which included a rental, do i need a 1099 from my mortgage compnay to file my taxes?
Posted on: 06th Feb, 2012 10:22 pm
Hi kimikatt!

Welcome to forums!

As far as I know, you will receive a 1099c form from the lender as you have received a discharge of that debt in your bankruptcy filing. You will be liable for paying taxes on your forgiven mortgage debt.

Feel free to ask if you've further queries.

Sussane
Posted on: 06th Feb, 2012 11:19 pm
I have 2 homes in IL couldnt sell one so its in foreclosure.The balance is 293000.I have credit cards 61000.My other home has 40000 in equity if i filed chapter 7 would i have to sell my house and give up the 40000?I was told i have to pay the credit cards back.Help me please i cant sleep anymore.
Posted on: 23rd Feb, 2012 11:15 am
I have filed for chapter7 and the car lenders attorney is still sueing me for the car. I have called the the lender and they havent came for the car ...What t do?
Posted on: 23rd Feb, 2012 11:15 pm
Hi twinky!

Welcome to forums!

If you have filed Chapter 7, then you must have included the credit card debts in it. In that case, your credit card debts as well as your mortgage debts will be discharged. You won't be personally liable for paying any of it

Hi Jannie!

Welcome to forums!

If you have filed bankruptcy, then the car lender won't be able to sue you for the car loan. If they do so, it will be considered as illegal.

Feel free to ask if you've further queries.

Sussane
Posted on: 24th Feb, 2012 12:59 am
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