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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 Miami,

I guess you are not personally liable for your debts of LLC. In that case, bankruptcy could be a viable option for you. As far as your credit report is concerned, it should not be harmed because business lines of credit or loans are not generally reported to your personal credit report. If the lender extended credit using your LLC's Tax Identification Number and the business name only, then these debts may not even show up on your credit report.

But, if you have personally guaranteed the debt of LLC, then this filing of bankruptcy can affect you and your credit report. Read the loan docs carefully and check out whether or not you've personally guaranteed the loan. You should even consult an attorney and check out his opinion in this regard.

Take care.
Posted on: 11th Jun, 2009 03:25 am
can I file for bankruptcy without filing tax returns
Posted on: 17th Jun, 2009 04:35 pm
how can you go about filling bankruptcy if you have no money to get it started?
Posted on: 18th Jun, 2009 08:01 am
I filed for chapter 7 bankruptcy and included a judgement in it. After I filed the creditor filed a writ of execution to obtain the judgement money. Am I protected since I've already filed?
Posted on: 19th Jun, 2009 10:39 am
My wife and i have a joint credit card balance of 50,000, and are struggling to pay the minimum,, we have no property, or assets
Should we file chapter 7,,and should we stop use of all credit cards, or maybe pre paid cards?
Posted on: 28th Jun, 2009 12:12 pm
hi!

to dondomay,

as far as i know, not all taxes are discharged if you file for bankruptcy. in my opinion, you will have to file your tax returns.

to angie,

i can understand that you are in a bad situation. but you won't be able to file bankruptcy if you do not have money to start the process. you can contact non profit organizations who may help you in filing bankruptcy. apart from this, you can contact friends and relatives who may help you in filing bankruptcy.

to missgg,

if the court passes a judgment in favor of your creditor, then you won't be protected though you have already filed for bankruptcy.

to gingerddd,

as you have a joint credit card debt, i would suggest you to go for a debt consolidation or debt settlement. a debt settlement will help you in reducing your payments by 40%-60% depending upon your situation. this will help you in paying off your debts.

feel free to ask if you've further queries.

sussane
Posted on: 28th Jun, 2009 09:39 pm
Hope anyone of you could answer my query… It's really stressful to know that the IRS would be coming after me. I'm planning to file bankruptcy. Can you guys tell me if filing bankruptcy would stop IRS collections? I have taxes which everybody thinks is unmanageable. Hope you could help me…thank you in advance.
Posted on: 01st Jul, 2009 03:04 am
Hi Tiara

As far as I know, filing bankruptcy can stop the IRS collection on certain actions like wage garnishments, property seizures, bank account levies, Federal Tax Liens and some lawsuits. This will come into effect once the court issues automatic stay. However, if there is any kind of tax fraud, then the IRS can take stern actions against you.

If you are filing bankruptcy just to avoid the IRS, then I don't think it would be a good idea. Rather you can contact the IRS and set up a payment plan which will help you in paying off the taxes.

Thanks.
Posted on: 01st Jul, 2009 03:23 am
Hello,

I've a question and hope someone here can help me. My wife and I are into bankruptcy due to huge credit card debts. There are some credit cards which has my wife's name as well as thus, she was also included into bankruptcy. We filed bankruptcy few months ago and have been consistently paying the dues. But, now things have changed and my wife has inherited some cash and land from her mother. Her mother is now deceased. The trustee told me that this inherited property can now be included into bankruptcy. My question is that I created the debts due to my fault. She was only on the credit cards and thus was included into bankruptcy. Why should her inheritance be included into bankruptcy filing? Is there any way that this inheritance can be protected?
Posted on: 04th Jul, 2009 01:28 am
hi mex,

in this situation, your wife's inheritance cannot be protected. this is because you and your wife have filed jointly the bankruptcy and you're both equally liable to pay off the debt. in your situation, you can voluntarily dismiss your bankruptcy after consulting your bankruptcy attorney. then you can pay off the credit card issuers from the money your wife received as inheritance. however, as soon as the bankruptcy case is dismissed, all the creditors will start calling again to collect their dues. it is also possible that these creditors will include late fees and interest into the balance you had prior to filing the chapter 13.

however, in my opinion, it would be better if you don't dismiss the chapter 13 bankruptcy and get it discharged. this will help you in discharging your unsecured debts. moreover, though your wife's inheritance is included in the bankruptcy, your attorney can negotiate for a good settlement for you and you will have some amount of money left over.

take care.
Posted on: 04th Jul, 2009 01:41 am
How much money can a couple keep in cash when they file Chapter 7? We own our two cars worth about 10,000 each and have a house we are foreclosing on.
Posted on: 04th Jul, 2009 07:02 pm
Hi jackbowley!

Welcome to forums!

Chapter 7 bankruptcy exemptions will apply only if you've equity in your property. If the equity in your property exceeds the exemptions (federal or state), then you may lose the home. In case, you don't have equity in the property, it won't be used to pay your debts and you can reaffirm the mortgage to save your property. It is same in case of a car as well. If you have equity in the car which exceeds the exemption, it can be sold off to repay your car loan.

Feel free to ask if you've further queries.

Sussane
Posted on: 05th Jul, 2009 10:11 pm
Hi there…I want to file bankruptcy and would like to know if bankruptcy would solve capital gains problems. Will I be liable for the capital gains tax even after my bankruptcy is discharged?
Posted on: 08th Jul, 2009 03:00 am
Hi Guest

As far as I know, the short and long term capital gains will be taxed by IRS. Capital gains taxes cannot be wiped out in BK. You'll have to pay the capital gains tax if you make profit by selling the property.

Thanks.
Posted on: 08th Jul, 2009 03:16 am
I hope I didn't shoot myself in the foot but I recently cashed out a retirement account to put into savings to pay our property taxes in a few months. I still have the check and haven't done anything with it yet because we have now decided to file ch 7 if possible. If I put that into my bank will they take into account the fact that I have upcoming property taxes / expenses and not take that money?
Posted on: 12th Jul, 2009 08:04 am
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