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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 Rosita,

It will be better if you could contact your bankruptcy attorney in this regard. He will let you know as to how you will have to fill out the Means Test form.

Thanks
Posted on: 25th Aug, 2012 12:25 am
I defaulted on a land loan due to the fact that it was interests only, and no one would loan me money for construction due to the downturn in realestate. I have been served as of yesterday papers saying I am being sued for 59K. The amount I owe. When would I file for chapt. 7. Family of 5 making 45k/year. No car loans, No cc debt. Just a mortgage.
Posted on: 30th Oct, 2012 02:25 pm
hi kyle,

you should immediately give a reply to the papers that you have served and negotiate with the lender to offer you a deed in lieu of foreclosure in order to get rid of the property. in case the lender does not agree to this, then you can contact an attorney and apply for bankruptcy filing.

thanks
Posted on: 30th Oct, 2012 10:59 pm
Hi My husband and I invested close to 100k on a family suggested stock and ownership that after 10 years just went Bankrupt.
We have about 40 k left on our first morgage. The loan for the investment is a homeequity loan that we are just currently paying the principal off. We have no credit card or any other debts.I was homeschooling for 10 years living on a 50K teahers salary just got a job that may bring in 20K more. we are a family of four and college is coming in 4 years. What are our options?
ME
Posted on: 20th Nov, 2012 10:36 am
hi noel,

bankruptcy has serious negative impact on the credit report of the person filing it. if you are able to deal with it, then you can go ahead with filing bankruptcy.
Posted on: 20th Nov, 2012 09:58 pm
Do I have to cash out my 401k in order to file for bankruptcy?
Posted on: 12th Dec, 2012 05:47 pm
Hi Traci!

Welcome to forums!

It is not mandatory for you to cash out your 401k in order to file bankruptcy.

Feel free to ask if you've further queries.

Sussane
Posted on: 12th Dec, 2012 09:15 pm
How to get a loan but I'm still under bankruptcy by legal mean.
Posted on: 04th Jan, 2013 06:38 pm
Hi Frankie,

If you're still into bankruptcy, then you won't be able to qualify for any kind of loan.

Thanks
Posted on: 06th Jan, 2013 10:48 pm
I filed chapter 7 back in 2002. I have an order discharging deptor letter in 2004. I have a property that was never forclosed on & I've been paying property tax on it since. There is a lien on it. Why did'nt the mortage company take the property back? Is there a time limit on the lien? Do I still have to pay the lien on the property or does the mortage company have to take it off.
Posted on: 18th Jan, 2013 02:47 pm
Hi ulie,

The mortgage company can sell off the property and recover the liens. You should get in touch with the lender and ask him to sell off the property ASAP.

Thanks
Posted on: 20th Jan, 2013 12:23 am
Hello, I'm confused.... i went to my meeting of creditors court date. The trustee asked if I receive a income tax refund, how much it will be, then said I must list it on my schedule b & c to get it exempted. I have looked at a lot of different websites listing bankruptcy law codes, but cannot find one to exempt my tax refund. Can you help?????????????
Posted on: 07th Feb, 2013 04:43 pm
Welcome Jenni,

In my opinion, you should get in touch with a tax adviser and he will help you further in this regard. He will let you know how much tax refund you may qualify for.
Posted on: 07th Feb, 2013 08:24 pm
In WA state ,filed chapter 7 last week ,my atty new i had not finished taxes and today they called and said i had a very large tax return ,my atty never told me anything about filing taxes first,i could have got my mortgage up to date and paid back my fees i borrowed etc,How much of this money can i keep now that i have already filed? can i use the wildcard rule for this ? Thank you frustrated my atty never calls me back or is available to talk about these things and my wife wants to keep the money and is pissed i did not know to file after taxes??Any help ??Thank you
Posted on: 26th Mar, 2013 09:02 am
In WA state ,filed chapter 7 last week ,my atty new i had not finished taxes and today they called and said i had a very large tax return ,my atty never told me anything about filing taxes first,i could have got my mortgage up to date and paid back my fees i borrowed etc,How much of this money can i keep now that i have already filed? can i use the wildcard rule for this ? Thank you frustrated my atty never calls me back or is available to talk about these things and my wife wants to keep the money and is pissed i did not know to file after taxes??Any help ??Thank you
Posted on: 26th Mar, 2013 09:03 am
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