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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
me and my wife are loking at filing chapter 7 we would like to know that our home and personal items will not be removed we have only been in our house for 5 yrs. our cars are paid for . and there is not much toward our assets.any info. would be great to hear
Posted on: 13th May, 2009 06:42 pm
Hi Guest!

Welcome to forums!

As far as I know, your personal items will not be taken if you file for Chapter 7 bankruptcy. You can save your home if you reaffirm the debts and pay according to the plan.

Feel free to ask if you have further queries.

Sussane
Posted on: 13th May, 2009 10:24 pm
My husband has racked up substantial debt, behind my back. We are now looking at chapter 7 bankruptcy, yet have been told that we exceed the house exemption for CA, because we have too much equity in our home. We are separated, and for me selling the house is not an option, since it is a family home. Is it true that if we have over $75,000.00 equity in the home, in CA, that we cannot file chapter 7??
Posted on: 14th May, 2009 09:48 am
You will have to pay the equity in the property to your bankruptcy trustee and then you may be able to file bankruptcy. Better consult your bankruptcy trustee. He would be the best person to guide you in this regard.
Posted on: 15th May, 2009 10:27 pm
Posted on: 21st May, 2009 01:50 am
hi guest,

you should remember that if you've a joint loan with your ex-spouse, then you would be liable for all the debt accrued with that account. thus, as a non-bankrupt spouse, you will not receive any protection from the government. creditors can come after you and ask you to pay off the debts.

you will have to judge whether the debts are jointly owned or not. you should note that in some community-property state, debts may remain the property of one individual, even in marriage. in that case, you're just a user on an account and not the authorized signatory. in such a situation, you'll not be responsible for the debts. however, if there is a mortgage on your property and you're a cosigner to it, then you would be totally responsible for the debts.

in case, if you find out that for most of the debts, your ex-spouse is responsible which can be eliminated through bankruptcy, it will be easier for you to re-establish your credit. however, if things go haywire and you find that you are equally responsible for most of the debts, you may consider filing bankruptcy. include all the delinquent account in your bankruptcy filing. once your bankruptcy is discharged, you can start working to improve credit.

take care
Posted on: 21st May, 2009 02:26 am
I have been thinking of filing for bankruptcy because i have multiple accounts in collections and paying back on a repo'd car. i have 2 more accounts that i havent been able to pay that havent gone into collections yet but i know there is no way i can afford to pay them once they do go into collections.

the only hang up of mine is that i've been working steady under the table since sept of 08. i did file my income taxes for 08' but will i be able to file for chapter 7 without provable income in 09?
Posted on: 23rd May, 2009 12:39 pm
Hi Guest!

Welcome to forums!

In order to qualify for filing Chapter 7 bankruptcy, you'll have to clear the means test. If your income exceeds the median income of your state, then you may not be able to file Chapter 7. I would suggest you to contact a bankruptcy lawyer and discuss your issue with him.

Feel free to ask if you have further queries.

Sussane
Posted on: 24th May, 2009 11:03 pm
My boyfriend and I are planning to get married and we are planning to buy a home for ourselves after our marriage. But the main problem is that he had to file bankruptcy due to sudden increase in the interest rate of his adjustable rate mortgage. However I’ve a good credit report all throughout. My question is - will his credit and bankruptcy status affect my good credit rating? Or will we be able to buy a home for ourselves in the near future?
Posted on: 28th May, 2009 03:30 am
Hi Mitchelle,

If you try purchasing a new property jointly, you will face difficulty in getting finance due to your boyfriend's bad credit. If you jointly apply for a loan, the lender will check your credit as well as your boyfriend's credit. As he has bankruptcy listed in his credit report, lender may refuse to give loans. In case, if some lenders agree to give you a loan, they can charge you high rates of interest.

However, if you wish, you can apply for a mortgage in your name alone. However, if your boyfriend wants, he can start building his credit once his bankruptcy is discharged. He can check out some of the simple steps to rebuild his credit from the given page:
http://www.mortgagefit.com/credit-rating/credit-repair.html

Take care.
Posted on: 28th May, 2009 03:41 am
My husband and I have lived in MA for the past five years, we have recently moved to ME and bought a house. We have approximately $62000 in credit card debt, would we loose our house if we filed Chapter 7? What state should we file in if we have only been living in ME for the past two months?
Posted on: 02nd Jun, 2009 07:45 pm
Hi mlcsec,

If you reaffirm the debts after your Chapter 7 bankruptcy is discharged, you will be able to save your property. You should contact an attorney and get to know which state you need to file the bankruptcy. He will be the best person to help you out.
Posted on: 02nd Jun, 2009 11:32 pm
Hello there…

Me and my wife have planned to file bankruptcy and we have a auto loan. We would like to keep the car and pay the mortgage on it. So my question is can we not reaffirm only the auto loan? Or will the bank repossess the car?
Posted on: 08th Jun, 2009 02:16 am
Hi Guest

A reaffirmation of the auto loan will help you in saving your car from repossession. However, it depends upon your lender's discretion whether he would allow you to reaffirm the loan or repossess the car. You can contact your lender and check out if they are ready to reaffirm the auto loan or not.

Thanks.
Posted on: 08th Jun, 2009 02:32 am
Hello everyone… I own a LLC along with my husband. There are lots of business loans in the name of LLC which we are unable to pay off at present…Friends and relatives have thus suggested about filing bankruptcy to save ourselves from creditors. My question is that if we file bankruptcy for the business debts of LLC, will our personal credit be affected?
Posted on: 11th Jun, 2009 02:51 am
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