Chapter 7 bankruptcy – Essential Guide
Chapter 7 bankruptcy is when you can’t afford to repay any debt, after all the ordinary household bills are paid.
It’s the most common type of bankruptcy. In Santa Clarita and Los Angeles County, we’ve helped thousands of people file Chapter 7 cases over the past two decades. In short, if you qualify, then you don’t have to pay debt back, and the process is relatively quick. But it has dangers that often outweigh the benefits.
Keep My Car / House
You might ask, what about my vehicle, can I keep my car or do I have to include it in the Chapter 7 bankruptcy? And the answer is yes. You have list all your assets in a bankruptcy, and a car or house is an asset, even if you’re financing it.
The next issue is, if I list it, can my keep my car or home in a Chapter 7, and answer is that it really depends. Usually, people do keep the home or car, but there a few wild card variables now. First, you have to of course stay current on the car or house payments, because you don’t a free car. Second, if your car lender sends you a reaffirmation agreement, you have to complete it and return it to them. Finally, does your car or house have too much equity? Because even if the lender won’t take it from you, the bankruptcy trustee sometimes can.
What Can be Kept
But beware. Chapter 7 is what they call liquidation bankruptcy. That is, you can lose stuff. You say, “I don’t have anything.” But aside from home equity, cars, and money in the bank, there are other assets you may have that aren’t so obvious. What about that claim someone owes you that you may or may not be suing them for? Or maybe that tax refund that you may get this year? Do we consider that thing you gave to your ex or brother or cousin, or that family debt you paid back 3 months ago? And where ever did all that money go you got from that big settlement or retirement disbursement you took 2 years ago?
Chapter 7 Eligibility
So, even if Chapter 7 bankruptcy sounds great to you, not everyone qualifies. There is a government chart put out that determines who can more easily qualify based upon current income. The theory is that the more income you earn, the greater the chance you can afford to pay some debt. If you can afford debt repayment, then you’re not eligible for Chapter 7.
People who earn too much income need to do a Chapter 13 bankruptcy. The more money you earn, the harder it is to be eligible for Chapter 7 bankruptcy. Congress decided that a couple earning, say, over $100,000 a year probably has money to repay some debt.
You may earn a lot of money, but maybe it all goes to taxes, or a mortgage. To try to be fair, Congress made a formula to filter out high-earning people with debt so Chapter 7 bankruptcy is only for those who truly need it. The means test looks at:
- Earned income you’ve (and the household) earned the past six months.
- Your car payments or mortgage payments.
- How much priority tax debt is involved.
- And a bunch of other factors.
The bankruptcy means test really is in two phases. First, do you make above or below a given number for your household size in your state. Second, assuming you make more, do you have enough allowable deductions to help you get back under the line. It’s as easy as that, and as hard as that. The Chapter 7 means test is a very long form, and it factors in IRS averages regardless of your spending, along with some actual numbers from your budget. It’s a skill to complete it (and can take a lot of time to input every pay stub), but a good bankruptcy attorney can maximize your chances of Chapter 7 eligibility.
Finally, after everything is calculated, either the person/couple qualifies for Chapter 7 or doesn’t. If their income is too high, there are still options. Maybe earnings can go lower in the months ahead, so it could be prudent to wait. Or, maybe the better option is to just file Chapter 13 bankruptcy and pay back whatever they can afford. Either way, there’s usually a solution.
Exemptions are what you use in bankruptcy protect and try to protect and save your things. Each type of property or asset you have has a limit or dollar amount of what can be saved. Some are unlimited. Some are protected in one type of exemption, and completely unprotected in the another type of exemption. So choosing the right bankruptcy exemption can make all the difference between, say, keeping your house or losing it, or the tax refund, car, etc.
This is a way to protect cash, money, tax refunds, and gets you a wild card. There’s very little available to protect a house though.
This is a way to use a homestead exemption to protect a house, but is very limited in what else it can do.
Chapter 7: Summing Up
This is a way to maybe eliminate debt without repayment, but you have to qualify. Even if you are eligible for Chapter 7 bankruptcy, be careful what you wish for. You can lose things.
Whatever you do, see a bankruptcy attorney or you risk losing your stuff. A friend, uncle or bankruptcy paralegal telling you what exemptions to take is practicing law without a license, and cause you harm. Meet with a bankruptcy lawyer. People really do lose things in a Chapter 7 bankruptcy. The good news is, with proper planning, there is a way to avoid disaster and find a path to being debt-free that is safe and without risk.
To find out if you qualify for Chapter 7 bankruptcy, give us a call. Maybe we’ll run the means test for you, or go over other options for you. Contact us now.