What is Chapter 7 Bankruptcy?
If you are unable to keep up with your credit card and loan payments, filing Chapter 7 bankruptcy can erase some of your debts. Chapter 7 bankruptcy is an option for consumers with limited income.
If your income is too high to qualify for Chapter 7, you can file for Chapter 13 bankruptcy protection.
What Happens to Your Property and Assets in a Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a liquidation bankruptcy. Many of your possessions will be sold to repay your existing debts. If you want to try and hold onto property such as a home or cars, you may want to consider Chapter 13 bankruptcy.
Chapter 13 bankruptcy is known as a reorganization bankruptcy: You are given a court-approved repayment plan that lasts for either three or five years. If you complete the repayment plan and are current with all your debt payments, you will be able to hold onto your property.
How Will Chapter 7 Bankruptcy Affect Your Credit?
Declaring bankruptcy will have a negative impact on your credit scores. A Chapter 7 bankruptcy stays on your credit reports for 10 years. A Chapter 13 bankruptcy stays on your credit reports for seven years. During the time a bankruptcy is on your credit reports it will have a negative impact on your credit scores.
But over time, the impact of the bankruptcy on your credit scores decreases. And if you focus on rebuilding your credit, your credit scores will improve even with the bankruptcy still showing up on your credit report.
Will I Lose My Home and Possessions If I File for Chapter 7 Bankruptcy?
Under Chapter 7 you will likely be required to sell many of your possessions to pay off your debts. Only certain possessions, up to certain dollar limits, can be kept when you file for Chapter 7.
What Property Can I Keep in a Chapter 7 Bankruptcy?
Some of your personal property is exempt from being sold when you file for Chapter 7 bankruptcy. But there are limits on the value of exemptions.
There are federal exemption rules and state exemption rules. Some states allow you to choose whether you want to use the federal exemptions or your state's guidelines, and some states insist that you use the state exemption level.
Seven Types of Federal Property Exemptions
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Homestead: You can retain up to $23,675 of equity in homes, mobile homes, coops or burial plots. If you do not use all of this exemption, up to $11,850 can be used for other property.
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Home Equity: If you have less than $23,675 in equity in your home, your court-appointed bankruptcy trustee may decide to not sell the home, as there will be no proceeds to pay off your debts after applying for your exemption. That does not prevent your lender from foreclosing on the property if you are not current with your mortgage payments. If your equity exceeds the limit, the house may be sold, you will receive your exemption amount, and the rest of the proceeds will be used to pay off debts.
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Motor Vehicle: Up to $3,775.
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Personal Property: This includes appliances, books, musical instruments, and pets—$600 per item and a total exemption of $12,625.
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Retirement Accounts: This includes all savings in a 401(k) or 403(b) and up to $1,283,025 in Individual Retirement Account (IRA) savings.
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Health Aids: The entire value is exempt.
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Jewelry: Up to $1,600.
Married couples that file for bankruptcy together can typically double the value of exemptions.\
Is Chapter 7 Bankruptcy Better Than Chapter 13 Bankruptcy?
Your personal circumstances should guide you in deciding whether Chapter 7 is better than Chapter 13. If holding on to your possessions is a priority, you may want to consider Chapter 13 bankruptcy. With Chapter 7 most of your possessions will be sold to pay off debts.
Chapter 7 is only an option for households with limited income; if your income exceeds your state's median and you are deemed to have enough disposable income to repay even a small portion of some of your debts, you will be required to file Chapter 13. Disposable income is the money that is left over each month after paying your essential living costs.
Will I Qualify for Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is for people with limited income who do not have the ability to pay back at least some portion of their debts. If your household income is below the median level for your state you are eligible for Chapter 7.
If your household income is above the median, you must pass a "means test" that assesses whether you have enough disposable payment to be able to pay back some of your debts. Disposable income is income you have leftover after covering essential living costs. If you are deemed to have the means to repay at least some of your debts, you will be required to use Chapter 13 bankruptcy.
What Is the Chapter 7 Bankruptcy Means Test?
If your household income is below your state's median you are eligible to file Chapter 7 bankruptcy. If your household income is above the median you may still be able to file Chapter 7 bankruptcy if you pass the Chapter 7 "means test."
The Chapter 7 means test requires you to complete a detailed 9-page form that documents your finances. The focus of the means test is to determine if you have enough disposable income to repay any of your debts. Disposable income is the money you have left after covering essential living costs.
For some essential living costs, such as food and clothing, you are required to use IRS National Standards for your allowable expense. Housing and utility costs are based on IRS Local Standards. Only some expenses such as car loan payments and childcare are based on your actual expenses.
If after deducting all your living costs, your remaining monthly disposable income multiplied by 60 is less than $7,700 you will be allowed to file for Chapter 7.
If your disposable income is more than $7,700 but less than $12,850 you will only be allowed to file Chapter 7 if you do not have enough disposable to pay back at least 25% of your unsecured debt. An asset—called collateral—that a lender can seize in the event you do not keep up with payments, does not back unsecured debts. Medical bills and credit card bills are examples of unsecured debt.
If your disposable income according to the means test is more than $12,850 you are not eligible to file Chapter 7. You will be required to use Chapter 13.
What If I Don't Qualify for Chapter 7 Bankruptcy?
If your household income is above the state median and you do not pass the Chapter 7 means test, you can only file for Chapter 13 Bankruptcy.
Can I Get Rid of Credit Card Debt If I File Chapter 7 or Chapter 13 Bankruptcy?
Unsecured debts, including credit card debt and medical debt, can be "discharged" through Chapter 7 bankruptcy. If you qualify for Chapter 7 your unsecured debts will be wiped out when the court approves your filing. This can take four to six months or so.
Will All My Debts Be Wiped out If I File for Chapter 7 Bankruptcy?
Filing for Chapter 7 bankruptcy protection does not eliminate your obligation to repay certain debts:
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Student loans are not discharged in Chapter 7 bankruptcy unless you can prove permanent injury or illness prevents you from repaying.
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Recent tax debt. Tax debt must be from filed returns that are at least three years old to be eligible for discharge, and you must have followed certain tax filing rules. If the IRS has placed a tax lien on any property prior to your filing for bankruptcy to recoup owed back taxes, Chapter 7 will not remove that lien.
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Alimony and child support.
A Chapter 7 bankruptcy will wipe out your personal obligation to pay your mortgage, but your lender will be allowed to foreclose on the home. If the sale of the home through foreclosure is not enough to repay the entire mortgage balance, some states allow lenders to hold you financially responsible for the deficiency.
How Do I File for Chapter 7 Bankruptcy?
You should consider hiring a lawyer who specializes in consumer bankruptcy. You will need to complete a series of official bankruptcy documents, including the Chapter 7 means test. Your petition for bankruptcy must be filed at a U.S. Bankruptcy Court.