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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 lrn,

You will have to list all your assets in your Chapter 7 bankruptcy filing. It will depend upon the bankruptcy trustee who would judge your financial situation and decide whether or not he would take money from your bank account to pay off your creditors. It would be better if you could speak to your bankruptcy attorney and decide what steps you need to take.

Thanks
Posted on: 12th Jul, 2009 08:28 pm
Hi there…need help immediately as I'm being sued by my creditors. I am desperate to come out of this situation and thus want to file bankruptcy. I do not have assets. However, I do receive unemployment which is below $900 a month. I've around 35,000 in medical bills. Also I have a credit card that I stopped paying a few yrs ago. Do you think I'll have to go for the Means test or will I qualify for Chapter 7 filing??? Do I need to submit everything like - tax returns, banks statements, pay stubs etc.
Thanks for help.
Posted on: 16th Jul, 2009 12:04 am
Hi Guest!

Welcome to forums!

As far as I know, you'll have to go for the Means test. This will ensure whether or not you qualify for Chapter 7. If you fail to clear the Means Test, you'll have to file Chapter 13 bankruptcy. You will definitely need to submit tax returns, banks statements, pay stubs or any other documents as asked by your bankruptcy trustee. Apart from this, if you file Chapter 7, you'll have to list all your assets.

You should remember that a Chapter 7 bankruptcy affects your credit report badly. It will remain on your credit report for 8-10 years. Moreover, you won't be able to get a mortgage within next 2-4 years.

Sussane
Posted on: 16th Jul, 2009 12:19 am
What % is used by a trustee to determin the cost to sell your house during Chapter 7?
Posted on: 17th Jul, 2009 01:59 pm
Hi George

The trustee will determine the value of the property and then arrange for the sale of the property. The mortgage and other debts will be paid off by selling off the property.

Thanks.
Posted on: 24th Jul, 2009 01:36 am
I have started a Chapter 7 bankruptcy and should be filed in the next two weeks. My uncle died Feb 2008 and had no will. My Dad and his brothers will be splitting a sizeable amount of money. I have been told I may receive some of this money from my Dad and uncles. What are my legal obligations with my bankruptcy. It may be 3-6 months before receiving. I live in the state of Indiana. Thank you
Posted on: 24th Jul, 2009 08:57 am
Hi Lorraine,

The inherited property can be included in the bankruptcy filing. You should speak to your bankruptcy attorney and then decide what steps you should take. The inherited money can be used to pay your creditors.

Thanks
Posted on: 24th Jul, 2009 11:08 pm
Can i still file for bankruptcy chapter 7 if I have made a withdrawal from my ira. I tried to work with creditors before going to lawayer to file, now I have some cash sitting in savings. I am the only one who is filing my husband is not and all bank accounts are joing.
Posted on: 27th Jul, 2009 09:14 am
MY Fiance' filed bankruptcy at the beginning of the year WITH the income tax refund he received from last year. HE HAS NOT RECEIVED HIS DISCHARGE YET. He did/does not have any property or anything that was worth any value for them to seize. There forth will the trustee seize the tax refund for next year when we file?? Even though we paid right at a $1000.00 for the bankruptcy? AND he has been driving my grandpas car, and he wants to give it to him, will it hurt to have the car switch over into my Fiance' name, or will they seize it? by the way, he has no vehicle in his name, he had to let it go back... I would appreciate any advice you could give... Thank you
Posted on: 27th Jul, 2009 07:55 pm
hi!

welcome to forums!

to miatia,

as far as i know, a bankruptcy filing by one spouse does not bring the other spouse into bankruptcy. moreover, the non-filing spouse may not even get the full protection of the automatic stay or the bankruptcy discharge. if you and your spouse are jointly liable to a creditor, the bankruptcy of one spouse does not relieve the other of paying the debt. the non-filing spouse will also be considered for the repayment of the debts in a chapter 7 bankruptcy case. in case of chapter 13 bankruptcy, if the debt is a consumer debt to be paid 100% through the chapter 13 plan, the co debtor is protected with the help of a co-debtor stay.


to anonymous,

in my opinion, it would be better if your fiance can transfer the car in his name after his bankruptcy is discharged. the bankruptcy trustee can seize the car if he transfers it now in his name in order to pay off his creditors.

feel free to ask if you've further queries.

sussane
Posted on: 27th Jul, 2009 08:35 pm
Will they seize you tax refund if you file for chapter 7?

Isn't chapter 7 where you combine all the bills and everything and they do away with them once you pay for the bankruptcy?? Will they take you Tax refund check? If so, will they take State AND Federal? Or one of the other??
Posted on: 28th Jul, 2009 10:16 am
The bankruptcy trustee can seize the tax refund. He can use the money from your tax refund to pay off your creditors. In chapter 7 bankruptcy, you get discharged from your unsecured debts. Your assets are liquidated in order to pay off your creditors.
Posted on: 29th Jul, 2009 03:24 am
My husband is considering filing ch.7 in the very near future and I will be attending a nursing program in Oct., will this be a problem with me applying for a pell grant or even student loans, if we file jointly.
Posted on: 08th Aug, 2009 03:47 pm
As far as I know, you would be able to qualify for government loans though you filed for bankruptcy. But there are limits to the amount of government loans you can receive each year. However, as private lenders would check your credit strictly, you would face difficulty in getting private loans.
Posted on: 11th Aug, 2009 03:10 am
I am not sure under chap 7 I have my furniture nothing new will they want to sell it or personal items / possertions?
Posted on: 18th Aug, 2009 11:20 am
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