A Chapter 7 is the most popular type of bankruptcy. The filing of a Chapter 7 bankruptcy case results in an automatic stay that prevents all attempts to enforce a debt owed. The main goal of a Chapter 7 bankruptcy case (as well as other Chapters) is to obtain a “discharge,” which allows individuals and businesses to obtain a “fresh start” and eliminate some or all debts.
A Chapter 7 bankruptcy is a liquidation bankruptcy, which involves the liquidation of any assets owned by debtors to pay their creditors. Thereafter, most debts are wiped out in a legal proceeding conducted under the Federal U.S. Bankruptcy Court. Bankruptcy, in effect, discharges debts such as credit card bills, medical bills, personal loans, delinquent utility bills, old tax debt, judgements, and deficiencies on repossessed vehicles. In a Chapter 7 bankruptcy, you will never have to pay your creditors for these debts following your discharge. Your mortgage, however, may remain.
There are several types of debts that usually cannot be discharged by filing a Chapter 7. These debts include alimony and child support debts, recent tax debt, student loans, fines for criminal violations (such as injury caused to another while under the influence), debts incurred through fraud, and certain types of court-ordered damage awards. Student loan debts may only be discharged if there are hardships such as a disability.
When eligible, a Chapter 7 bankruptcy provides great advantages to debtors as it allows them to erase most debt they owe in a matter of 4 to 6 months.
Who is eligible to file a Chapter 7 bankruptcy?
A Chapter 7 discharge is not a right that everyone enjoys, but most people who are experiencing financial challenges, and do not earn a high income or any income at all, will meet the requirements to file. Effective in 2005, when bankruptcy laws changed, individuals who file Chapter 7 cases must submit proof of income. Your income will then be compared to the state median level. If your income is at or below the state median income level, you may qualify for a Chapter 7. However, if your income exceeds the state median level, you may be required to pass the “means test.”
The “means test” measures your ability to repay some of your unsecured debt with disposable income, or income that may be left over at the end of the month after all necessities are paid. It is not easy to determine if you pass the “means test.” KatzLaw offers a complimentary consultation and evaluation, at which time we can determine whether or not you meet the requirements to file a Chapter 7 bankruptcy. If you are looking for a Chapter 7 bankruptcy attorney, KatzLaw has you covered!
How long will a Chapter 7 bankruptcy take?
Chapter 7 cases are relatively fast and take approximately 4-6 months until a discharge is received. However, if you have a complex case, or the creditors and/or Chapter 7 trustees object to your discharge, the process can take longer.
Will I lose my home if I file a Chapter 7 bankruptcy?
An overriding concern for many contemplating a Chapter 7 bankruptcy is whether one’s house will be lost in the process. Whether you can keep your home in a Chapter 7 bankruptcy depends on how much equity you have in the home, the amount of homestead exemption available to you, and whether you are current on your mortgage. Even if you will not lose your home in a bankruptcy, you should consider whether you can afford your home in the long run. If not, you may want to surrender your home in a bankruptcy for tax purposes.
The general rule is that you may keep your home if:
- You do not have any equity in your home and you are current on your payments, OR
- Your equity is covered by a homestead exemption.
Equity – Equity is calculated by reducing all liens (mortgage liens, judgement liens, tax liens, etc.) from the value of your home. If you get a positive number, that is the amount of your equity.
Homestead Exemption – Homestead exemptions protect a certain amount of equity from the reach of the bankruptcy trustee. There are state exemptions and federal exemptions, and it is the debtor’s choice as to what set of exemptions will be used.
Doing the Math. If the homestead exemption covers all of your equity, you may keep your home. If you have equity left over after applying the homestead exemption, you are at risk of losing your home as the Chapter 7 trustee assigned to your case may decide to sell the property and use the proceeds to pay your creditors. If the difference is small, the trustee may decide that selling your home is not worthwhile, especially if the costs of a sale will eat up any remaining equity. Another option is to pay the trustee for the nonexempt equity or give up some nonexempt property in exchange for keeping your home.
If you are behind on your monthly mortgage payments on your home, a Chapter 7 bankruptcy does not provide a way for you to catch up. So, unless you can negotiate something with your lender independently from the bankruptcy, you will most likely lose your home. If you want to save your home, and have sufficient income to do so, a Chapter 13 bankruptcy may be a better alternative for you.
How will a Chapter 7 bankruptcy affect my credit?
If you choose to file a Chapter 7 bankruptcy case, the bankruptcy will appear on your credit report for approximately 10 years. However, this does not prohibit you from obtaining new credit.
After a discharge is received, debtors often start receiving new credit card offers shortly after they receive their discharge. Credit card companies realize that you are more likely to pay back your debts after a bankruptcy because your discharge likely freed room in your budget and you cannot receive another discharge for many years. Secured credit cards are also recommended. When you receive a secured card, you deposit a certain amount of money in the bank and, in exchange, you will have a line of credit equal to the amount in the account. A secured credit card allows you to rebuild your credit because your payments are typically reported on your credit. Continuing to pay all of your bills and doing some financial planning will also help you avoid filing another bankruptcy in the future, and it will strengthen your credit.
If you are ready to file a Chapter 7 bankruptcy, or if you would like to learn more, please contact us now at (844) KATZ-LAW or email us at KatzLawAPC@gmail.com!