13 Jan Bankruptcy Basics: When is Chapter 7 A Good Option?
Chapter 7 bankruptcy is also known as a straight bankruptcy. It can be quick and straight forward, depending on the facts of the case.
The simplest definition for Chapter 7 is that debts someone can’t pay back aredischarged, or forgiven, and they get a chance to start over debt free.
How do you know if you should filea Chapter 7 bankruptcy?
Chapter 7 Bankruptcy is a good option if:
- all of your property is protected from creditorsOR
- walking away from the debts is worth giving up property that is not protected
- after paying your necessary and reasonable living expenses, there is no income left to pay towards your debts.
What property is protected in Chapter 7?
Some property is protected from creditors if they sue you, but the creditors can keep trying to collect for years, or they can wait until you get property that isn’t protected. The property that is protected from creditors is calledexempt property.
In bankruptcy, you also get to keep exempt property but once you file bankruptcy, you don’t need to worry about the creditors every trying to collect again. Chapter 7, you have to give up non-exempt assets on the day you file, but then it is over. The non-exempt property can be sold. Whatever money they get is applied towards your bills, and but you won’t owe a balance even if the debts aren’t paid off.
Exemptionsvary from state to state and determining which law appliescan be complicated. What you get will depend on where you live, and also how long you have lived there. Exemptions are modest in some states, and more generous in others. If you have lived in your state at least two years, you get your state’s bankruptcy exemptions. If you haven’t, then you might be required to use eitherthe exemptions from a state you used to live inor the Federal exemptions.
What if all your property isn’t exempt?
If you have some property that isn’t exempt, there may be ways to increase your protection, but it must be done with care. It is important to consult an experienced bankruptcy lawyerin your state to determine which exemptions you can claim, what assets are protected, and how to plan and maximize your exemptionsfor the best protection available.
You might get better treatmentif you file before you have to use the laws of your state, or it might be better if you wait to file your bankruptcy case after you can use them.
What debts are written off in Chapter 7?
Most debts are discharged in bankruptcy but the goal of most people whofile for bankruptcyis to dischargegeneral unsecured debts(without collateral) like credit cards, loans, and medical bills. Some taxes, student loans, support and a few other types of debt is not discharged.
What about secured debts, like home loans or car loans?
Those debts can be discharged too if you are willing to walk from the collateral, butyou don’t get to file bankruptcy on a secured debt and get the collateral for free.
Many people are able tofile Chapter 7 bankruptcy and keep their homeor car. It depends on how much equity there is in the property. As long as the equity is protected, then the bankruptcy shouldn’t cause you to lose the asset, but you do need to make the payments.
What if you don’t have non-exempt assets, but you do have discretionary income?
If all your assets are protected, you might want to file a Chapter 7 and start over. Your income and expenses are disclosed in your bankruptcy petition in different formats.Depending on how much you make and spend, you might not qualify for 7 and you might need to consider Chapter 13 instead.
You have to reportwhat you really make and spend. Sometimes people do have money to pay towards their debts, but not enough. Your income and expenses are also evaluated using a formula called the Means Testto determine if there is a presumption that you ought to have money to pay towards your debts. The Means Test is often inaccurate. Sometimes it says you have extra income that isn’t there, and sometimes it says you are broke when you aren’t.
- Chapter 13might be a better option for you if you don’t qualify for Chapter 7 because of the Means Test,you have money to pay towards your debts, or you have assets that you can’t exempt but want to keep.
Latest posts by Susanne Robicsek, North Carolina Bankruptcy Attorney (see all)
- New Bankruptcy Forms: Easier, Or More Problems? - January 20, 2016
- Forget about Bankruptcy - August 29, 2013
- After Chapter 7 Bankruptcy Discharge: Can You Take A 401k Loan? - March 13, 2013
- What Is A No Asset Bankruptcy Case? - February 13, 2013
- Bankruptcy Basics: When is Chapter 7 A Good Option? - January 13, 2013