What Does Chapter 7 Bankruptcy Mean?
If you make the decisions to file for bankruptcy it is important to understand what it really means. Chapter 7 bankruptcy allows you to discharge debt and provide a fresh start. Rather than making a payment plan for debt like Chapter 13, Chapter 7 bankruptcy completely removes debt.
People might prefer to file for Chapter 7 to avoid having to pay debt altogether. However, not everyone will qualify for a Chapter 7 bankruptcy and Chapter 7 means liquidation of assets.
Eligibility to File for a Chapter 7 Bankruptcy
If your monthly income is more than your state’s median you will to go through the means tests. The means test determines if you filing for Chapter 7 is abusive. Filing for Chapter 7 is abusive if your monthly income, over a 5 year period, is:
- Over $12,475
- 25% of your income goes to non priority unsecured debt over the amount of $7,025
If the Chapter 7 bankruptcy is abusive after the test, you can agree to convert to a Chapter 13 or dismiss the filing.
Process of Chapter 7 Bankruptcy
The debtor is the person filing for bankruptcy (you), gets a bankruptcy trustee. The assigned trustee is the person handling your bankruptcy. One of the trustee’s responsibilities is managing your debt.
Certain property you can keep because it is exempt from liquidation. But, bankruptcy trustee gathers and sells any non-exempt assets and uses the money from these assets to pay creditor claims. The creditors are the people you owe money to.
For example, you bought a painting worth $10,000 and you charged that painting on a credit card from ABC bank. When that painting is sold, it does not mean that ABC bank will receive the money. The money from the sale might go to other creditors.
Dealing with Assets and Debts in Chapter 7
Most Chapter 7 bankruptcies are “no-asset” filings which mean the debtor has no property to sell. In these cases the there is little to no money to pay off debts. When you have assets and funds are available the trustee pays debt according to a ranking system.
If you have items with equity, the bankruptcy trustee will collect and sell these assets to begin paying off creditors. Therefore, if you have a home with equity, it is important to consider this equity before filing for bankruptcy.
Homestead and Personal Property Exemption
Homestead Property Exemptions
Although many states have homestead exemptions for your home and other property, you can occasionally use the federal standards. Homestead exemptions protect the equity in your primary residence and some personal property against creditors and bankruptcy. If your state’s homestead exemption is greater than the amount of equity in your home you will not have to surrender your home as an asset to liquidate and repay creditors.
Homestead exemptions vary by state. If your state allows the use of the federal exemptions amount you can protect $23,675 for single filers or $47,350 if you are married and jointly filing bankruptcy.
Regardless of it your state allows an unlimited homestead exemption, federal law requires you to have established domicile in your home. By federal law, you must have lived in your home at least 40 months before filing for bankruptcy. If you have not lived in your home for 40 months then your homestead exemption is capped at $160,375.
Example of Homestead Exemption
If you have a home worth $275,000 and your current mortgage debt is $150,000 you have $125,000 in equity. If your home is homestead and your state provides $75,000 in homestead protection, there is still a balance of $50,000 of equity in your home. In this case, your home would be sold for the $275,000 market value. The mortgage is paid off leaving the $125,000. You will receive $75,000 as your homestead exemption provides and the final $50,000 is used to pay fees and creditors.
Generally, you must file for homestead status on your house. To file for homestead exemption the home must be your primary residence.
Personal Property Exemptions Protect Your Belongings
Personal property includes all property you have other than real estate. For other personal property the following federal personal property exemptions are:
- $3,775 for your motor vehicle
- $1,600 for jewelry
- $12,625 aggregate value ($600 per individual item) on household goods (furnishings, appliances, clothes, books, animals, crops, musical instruments)
- $2,375 for tools of the trade including implements and books
- health aids
- $12,625 in loan value, accrued dividends, or interest in a life insurance policy
Exemptions to Protect Support and Benefit Payments
- Spousal support or child support that you need for your support
- Life insurance payments that you need for your support
- All Social security benefits
- Unemployment benefits
- Veteran’s benefits,
- Public assistance
- Disability or illness benefits
- Recovery received due to injury ($23,675 for personal injury)
- Award for the loss of future earnings
- Recovery for the wrongful death of the person you relied on for support
- Compensation received as a result of being a crime victim
- Tax exempt retirement accounts, except IRA’s with more than $1,283,025
In addition to the homestead and personal property exemptions, some states will have a wildcard exemption or allow you to use the federal exemption. Currently, the federal exemption is $1,250 plus $11,850 of any unused portion of your homestead exemption. The unused homestead exemption of $11,850 is available to use to exempt any property of your choosing.
Debts in Chapter 7 Bankruptcy
Generally, no court hearings are needed for automatically non-discharageable debt. Unless you can display extraordinary circumstances to override this automatic status these debts will remain even after bankruptcy.
- Unscheduled debt (those not listed in the bankruptcy petition)
- Child Support
- Spousal Support
- Income tax bills
- Money owed for causing personal injury or death of another person due to drugs or alcohol
- Willful and malicious acts criminal fees and fines
- Court fees and fines
- 401k loans or retirement plan loans
- HOA’s, condo fees etc.
- Overpayment of government benefits, fees and fines
- Credit card debt* (see below)
- Student loans*
- Liens on property*
- Debts not dischargeable if a creditor successfully objects
Student loans are not a priority debt, but they are extremely difficult to discharge in a bankruptcy. Courts often use a means test to prove undue hardship as a means of discharging student loan debt. With this test you must prove poverty, persistence and good faith effort to pay.
- Poverty is based upon current income and expenses and the ability to maintain a minimal standard of living
- Persistence determines if your current situation is likely to continue for a significant time
- Good faith determines if you have made an effort to repay your student loans
Private student loans used were previously treated like unsecured debt. However, in 2005 Congress made a change the status of these loans and they are now treated similar to federal loans. Since this change, you must prove undue hardship similar to the means test used for the federal loans. Discuss school loans with an attorney when you make the decisions to file bankruptcy. If you decide to resolve student loan issues yourself read more about options here.
Liens on property are created when you owe a debt on property (mortgage) or a creditor sues you and gets a judgment against you. When the creditor attaches the judgment to your property it becomes a lien. Attaching the judgment to your property converts the once unsecured debt to a secured debt. In many cases creating this link to your property guarantees payment. However, if the property has multiple liens and not enough equity to cover them all, some will not get paid.
Although liens on a property are not technically a priority debt, they are not discharged with bankruptcy. The liens are only discharged if you include the property in the bankruptcy filing.
Debts which are Dischargeable in Bankruptcy
Credit cards are non-priority claims and generally fall at the bottom of the list. Therefore, credit card claims usually receive no payment at all. However, there are instances when credit cards debts stay with you.
In cases of actual fraud, the debt is non-dischargeable and stays with you after bankruptcy. As of April 2016 to April 2019, credit card fraud is defined as:
- Any luxury goods (purchases above $675) incurred 90 prior to filing bankruptcy.
- Cash advances of $950 or more incurred 70 days prior to filing for bankruptcy.
If you expect to get these items discharged the burden of proof will fall on you to prove your actions were not fraudulent.
Cars are usually a necessity because they allow you to get to work and take care of important tasks. Keeping your car usually depends on how far behind on payments you are and if the car has equity. If you are behind on car payments you cannot catch up on payments like you can in a Chapter 13 bankruptcy. If you do not owe money on your car it has equity.
There are federal and state exemptions that allow you to protect a certain amount of equity in your car. If your car is worth more than the allowable equity you can either sell it or pay the amount above protected equity to the trustee to keep the car. If you owe money on the car you can use one of the secure debt handling methods, redeeming the car or reaffirming the loan.
Keeping your Car
Reaffirming means you form a new contract and payment plan with the lender. The agreement holds you accountable for paying the car and remaining liable for the debt after bankruptcy. You must show you need the car and the payments will not cause an undue hardship. If you do not have a need, the court will not approve the agreement and take the car for sale against your debts.
Redeeming the car means paying the entire debt in a onetime payment. You and the creditor must agree to the value of the car regardless if the current value is the amount you owe. Once the payment is made you can keep the car. Whatever amount owed over the agreed upon value is discharged.
You can also surrender the car back to the original creditor which will resolve the entire liability. The creditor cannot seek any deficiency judgments against you in these cases.
Medical debts are considered unsecured and non-priority debt. There is no limit on the amount you can discharge.
Chapter 7 Bankruptcy Affects on Co-signers and Creditors
When filing for Chapter 7 bankruptcy, remember, anything discharged is only discharged against you. Any co-signers will be still liable for the debt. To prevent the creditors from going after co-signers, you have to exclude the debt and pay it yourself.
Reasons for Denial or Dismissal of Chapter 7
Dismissal of Chapter 7
Keep in constant contact with your lawyer to help get you through the bankruptcy process. Make sure you follow all the required steps and make all necessary court appearances. You lawyer will instruct you if there are court appearances you do or do not need to make. If your bankruptcy gets dismissed due to failure to appear or comply with court orders you are not eligible to file again for 180 days.
Denial of Chapter 7
The court can deny a Chapter 7 discharge for the following reasons:
- If you do not provide tax documents as requested by the courts
- You don’t complete a personal financial management course
- If you transfer or hide property in order in an attempt to defraud or hinder your creditors
- Attempting/actually destroying or hiding books or records
- Committing perjury or other fraudulent acts in connection with your bankruptcy case
- Hiding/not accounting for lost assets
- Violating a court order
- Having previously filed a bankruptcy case and were granted a discharge. Chapter 7 discharge within the last 8 years or Chapter 13 discharge within the last 6 years.
Chapter 7 Discharge
A discharge occurs in a Chapter 7 bankruptcy when the time expires for creditor to file a complaint objecting bankruptcy filing. This is typically about four months after the date you file a petition with the bankruptcy court. Unless there are objections, you will usually receive a discharge automatically. Again, if there is a valid lien on property and that property was not included in the bankruptcy the discharge does not apply.
A bankruptcy discharge releases you from any further personal liability from discharged debt. The discharge is a permanent order which prohibits the creditor from taking any additional action on you. The discharge date is the date when creditors start considering a bankruptcy filing complete.
The bankruptcy trustee will mail a letter to all creditors informing them of the discharge. The letter to the creditors will state the debt owed by you has been discharged. Additionally, creditors are notified that further collection attempts are punishable by law. Chapter 7 bankruptcy shows for ten (10) years after the discharge date. The ten (10) year reporting date is longer than the seven (7) year reporting date of Chapter 13.