Disclaimer: This post is not legal advice and does not create an attorney-client relationship. Rather, this is generalized information intended to help individuals who are beginning the process of considering a Chapter 7 bankruptcy. Every case has its own nuances, consult an attorney.
Call of the Question
Should You File a Chapter 7 Bankruptcy?
Introduction
What Types of Bankruptcies are Available?
For most individuals, filing for bankruptcy will mean choosing between a Chapter 7 or a Chapter 13 bankruptcy.
Chapter 13 bankruptcy involves restructuring an individual’s debt. The court approves a plan to allow you to repay your debts at a reduced rate. The plan usually lasts 3-5 years and at the end of the period your debts are discharged and you end up paying only a fraction of the amount you actually owed before filing.
Chapter 7 bankruptcy involves the complete discharge of an individual’s debts, meaning you are no longer liable for them, and is what this article will focus on.
What Are the Benefits of Filing Chapter 7 Bankruptcy?
First, for many, bankruptcy is a chance to start fresh by discharging most, if not all, of their debt and rebuild their credit. Be aware that it can take a long time to re-establish credit following a Chapter 7 bankruptcy, but you can get back on track sooner rather than later by addressing your debt issues rather than ignoring them.
Second, filing bankruptcy stops creditors from harassing you. While there are a few exceptions, in general, when a person files for Chapter 7 bankruptcy a “stay” goes into effect which prevents creditors from attempting to collect on the debt.
Should You File?
Whether you should file a Chapter 7 bankruptcy will depend on several factors, in particular
- Are you eligible to file a Chapter 7?
- Is your debt the type of debt that will be discharged?
- Will you lose any property?
1. Are You Eligible to File a Chapter 7?
Not everyone is eligible to file a Chapter 7 bankruptcy. In order to be eligible to file you must pass your state’s means test. In basic terms, the means test is a calculation used to determine whether you make too much money to file a Chapter 7. Each state has a different “magic number.” If you initially fail the means test there are options available to you that could still allow you to file a Chapter 7. Consult an Attorney to be certain your means test calculation is done properly and determine what other options may be available to you if you do not meet your state’s guidelines, including, but not limited to filing a Chapter 13 bankruptcy.
Furthermore, you are not eligible to file Chapter 7 if you received a discharge of your debts under Chapter 7 within the past 8 years.
2. Is Your Debt the Type of Debt That Will Be Discharged?
Most, if not all, of your debt will be discharged in a Chapter 7. However, not all debts can be discharged through a Chapter 7 bankruptcy. Take a moment to consider what type of debt you are seeking to discharge through a Chapter 7. In particular the following are common debts you should be concerned about:
a. Debts rising from a separation agreement or divorce decree
b. Child Support arrearages
c. Alimony arrearages
d. Court ordered restitution and other government fines and penalties
In addition, there are other debts that can survive a Chapter 7 if a creditor (the person owed the money) successfully challenges the discharge of the debt. For example,
a. Debt on the basis of fraud
b. Debt from intentional injury to another person or another person’s property
c. Debt from buying luxury items before filing bankruptcy. In other words, don’t buy those new golf clubs and designer sunglasses with the specific intention of filing for bankruptcy the next day.
If a large chunk of your debt you are seeking to rid yourself of falls into one of these categories a Chapter 7 may not be right for you. For most people however, a Chapter 7 will discharge all of their debt.
3. Will You Lose Property?
Contrary to popular belief most people will not lose any property through a Chapter 7 Bankruptcy. In fact, bankruptcy can actually help you keep your property. However, there is the chance that some property will be lost through the process. It is important to take a long hard look at your property and determine if you will lose valuable property that you want to keep and cannot live without.
An entire book can be written on how you determine what property you get to keep. In general though, whether you lose any property will be based largely on 2 factors
a. Your state’s exemption laws
b. Whether there is equity in the property
These two factors work in conjunction with one another. Each state has a set of exemption laws that allow you to keep certain property up to a certain amount. Furthermore, the trustee will not take and sell property in your bankruptcy estate if selling it would not raise any proceeds to pay to your other creditors.
For example, clients are usually most concerned with whether they will lose their home. In today’s economy many find themselves with little to no equity in their home. If the equity in your home does not exceed your state’s homestead exemption and you can keep up on your mortgage payments you will not lose your home. This is a simple example; consult an attorney for your specific home and debt issues. It is helpful to have the approximate value of your home and all paperwork concerning mortgages, home equity loans and liens on your property.
Many clients will also ask if they should transfer valuable property to another person before they file for bankruptcy. The simple answer is no. Your bankruptcy estate consists of property you own, property you own, but do not have possession of, and recently given away or transferred property. The bankruptcy trustee reserves the right to take back recently transferred property and may even throw your case out of court if he/she feels the transfer was to deceive the Court.
Conclusion
Deciding whether to file a bankruptcy is a big decision. When determining whether a Chapter 7 bankruptcy and a complete discharge of your debt is right for you consider 3 factors. First, determine whether you pass your state’s mean’s test and are eligible to file a Chapter 7. Second, sit down and think about the type of debt you are looking to discharge and whether a Chapter 7 will discharge that debt. Most debts can be discharged in a Chapter 7 bankruptcy, but as noted above, certain types of debts will survive. Finally, determine whether you will lose any property you just cannot live without. Most people will not lose any property through the bankruptcy process, but every situation is unique.
Disclaimer: This post is not legal advice and does not create an attorney-client relationship. Rather, this is generalized information intended to help individuals who are beginning the process of considering a Chapter 7 bankruptcy. Every case has its own nuances, consult an attorney.
