Chapter 7 Property Exemptions
We mentioned above that Chapter 7 often is referred to as liquidation bankruptcy, which suggests everything the debtor owns is available for one big yard sale to help satisfy creditors.
Only rarely, however, does the extreme liquidation scenario meet reality.
The process can be punishing, but the impetus behind bankruptcy law is getting consumers out of crushing debt and providing a fresh start. Taking everything from Chapter 7 applicants would do nothing to get them back on their feet, ready to become financially successful contributors to their communities.
With this in mind, bankruptcy law largely exempts property that qualifies as necessities of modern life that is, possessions necessary for living and working.
Everyone requires stuff to keep a job and a house, says Auburn, Calif.-based attorney and consumer finance consultant Lyle Solomon, and bankruptcy’s fresh start would be meaningless if it deprived you of everything you own.
That does not mean that you must keep all you own. Instead, bankruptcy exemption laws safeguard property that people require, such as a working car, furniture, and clothing. It’s nonexempt if a bankruptcy exemption doesn’t cover your property.
Property exemptions include:
The Chapter 7 Bankruptcy Process
The first step should always be to contact a Chapter 7 bankruptcy lawyer to help you navigate the process.
Gather Financial Documents
Before you file, you will need to have all of your financial documents ready. When you visit your lawyer, they will make copies of the documents and return the originals to you.
Some of the documents you will need include:
- Paycheck stubs for the last six months
- Information about additional income over the previous six months
- State and federal tax returns for the previous four years
- Bank statements for the last four months
- Bills showing account numbers and creditor addresses
- Real estate deeds
Qualifying for Chapter 7 Bankruptcy
The Means Test will ultimately determine if you qualify for Chapter 7. This will require a review of your gross income for the last six months, the number of people in your household, and your expenses.
Pre-Bankruptcy Credit Counseling
Debtors filing Chapter 7 are required to take pre-bankruptcy credit counseling. This is typically an online course about filing for bankruptcy and other debt relief options. It typically costs around $30.00.
Complete & File Bankruptcy Forms
If you decide Chapter 7 is your best choice, you can complete the necessary forms and file them with the appropriate bankruptcy court. Your attorney will review your information and ensure your forms are accurate. Errors could delay a Chapter 7 bankruptcy.
Pay a Chapter 7 Filing Fee
Send Documents to Your Bankruptcy Trustee
What Are The Steps To Filing Chapter 7 Bankruptcy
We have discussed the do-it-your yourself steps. Nonetheless, the success of your Chapter 7 bankruptcy most likely will lie in finding an experienced bankruptcy attorney. Once you decide on an attorney, you can refer creditors to your lawyers office. Filing the petition will trigger an automatic stay, which means creditors cant pursue lawsuits, garnish your wages or contact you about your debts.
Dont take our word for it. I would counsel someone who is considering Chapter 7 bankruptcy to consult with an attorney to discuss the ramifications of filing for bankruptcy, Sinha says. Bankruptcy can have a long-term impact on a person’s credit score and ability to obtain credit in the future.
Here is a potential timetable:
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Finding The Median Household Income Of Your State
The next step in determining your Chapter 7 income limit is to compare your household income to the median household income of your state.
The median household income for your state is determined by the U.S. Census Bureau and changes frequently. In 2021, the lowest median in the country was Mississippis, with a median of $45,317 for a one-person household. The highest was Hawaiis, at $72,396.
The U.S. Department of Justice, which oversees the countrys bankruptcy courts, makes it easy for you to find out what the median in your state is, though. Its means testing webpage has a box titled Data Required for Completing the 122A Forms and the 122C Forms, with a dropdown that has the latest state median household income data.
If your median income is below your states median, youve met the income limit for Chapter 7 bankruptcy and dont have to complete the rest of the means test.
Means Test And Disposable Income
The means test requires you to calculate your income and expense information. Income includes almost all sources of income you have, including business income, interest and dividends, pensions and retirement plans, household expenses paid by others, alimony and child support, workers compensation and unemployment income, amongst others.
Allowable expenses are subtracted from your average monthly income. These expenses are based on national standard of living, car ownership and out of pocket health care costs, as well as local standards for housing and transportation. These expenses are derived from information supplied by the Census Bureau and the Internal Revenue Service.
If your total monthly income over the course of the next 60 months is less than $7,475 then you pass the means test and may file for Chapter 7. If you are over $12,475 then you do not pass the means test and must instead consider Chapter 13 bankruptcy for debt relief. If you fall in between these two values you must do additional calculations to determine if you have enough income to pay 25% of your unsecured debts over the next five years. If you dont, you qualify for Chapter 7. If you do, Chapter 13 is your only option. In addition, the court after examining the totality of your circumstances, may decide you qualify for Chapter 7. All calculations aside, if you demonstrate a need for Chapter 7 due to events like a serious family or medical matter, the court may allow you to file Chapter 7.
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Ways Chapter 7 Bankruptcy And Chapter 13 Bankruptcy Are The Same
- Filing for bankruptcy protection stops all collection and foreclosure actions.
- You will still owe child support, spousal support, unpaid taxes, and/or criminal fines.
- The bankruptcy will remain on your credit report for a few years, but you will be able to build your credit score at a fast rate.
You have the legal right to consult with, work with, and be represented by a Columbus, Ohio, bankruptcy attorney at all stages of the application, negotiation, hearing, and debt repayment process.
A Chapter 7 bankruptcy typically lasts about 4 months from start to finish, where a Chapter 13 typically takes anywhere between 3 and 5 years.
Many consumers choose Chapter 7 when filing bankruptcy. Chapter 7 does not require a plan of repayment. Instead, some debt is completely wiped out. If you meet the financial requirements, Chapter 7 is often the best alternative for you.
With Chapter 13 bankruptcy, a repayment plan is put in place to pay back part or all the unsecured debt. This gets handled through the court system, and the payments are made over a period from 36 to 60 months. The amount repaid to creditors will be equal to or greater than what the creditor would receive if the assets were liquidated. If the repayment plan is followed through correctly, the unsecured debt that is remaining is discharged. If you have fallen behind on your house or car payments, Chapter 13 can help keep the assets you have worked so hard to earn.
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Exceptions To The Means Test
There are two exceptions to the means test: Filers with more than 50% non-consumer debt dont have to take the means test, since the debt comes from business or profit motive.
Foohey said that exception doesnt apply to most people who file Chapter 7 bankruptcy. There are only two types of debt business and consumer. If someone does not own or run a business, thereby incurring debt in the course of that business, they should exclusively have consumer debt, she said.
Another is the Exception for Qualifying Service Members and Veterans. Because of passage of the 2018 HAVEN Act , the service income of disabled veterans, reservists on active duty and National Guard members arent included in household income calculations. Veterans and active-duty military may find themselves with a lot of financial challenges as they deploy or frequently move. But there are also a lot of veteran debt relief options and benefits.
People who derive their income solely from Social Security also dont have to take the means test.
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The Chapter 7 Income Limits And The Bankruptcy Means Test
The bankruptcy means test is a calculation laid out in the Bankruptcy Code. The starting point for this calculation is your stateâs median household income. Median income can be part of the Chapter 7 income limits. If your household income is less than the median household income for the same household size of the state youâre filing in, you make less than the income limit. This means you pass the Chapter 7 means test and qualify for Chapter 7 bankruptcy.
If your household income is greater than the median, you may still qualify for Chapter 7 bankruptcy if your household expenses under the means test calculation donât leave you with any disposable income. More on that in Part 2, below.
Debts Included In A Chapter & Bankruptcy
You can eliminate many if not all of your debts through a Chapter 7 filing. This includes:
Other forms of unsecured debt are also likely eligible to be eliminated without repayment through Chapter 7 bankruptcy discharge. If you think chapter 7 bankruptcy may benefit your financial situation, a lawyer can answer any questions and help weigh your options.
Not Just Any Debt Attorney
As a leader in consumer law, Jeremiah E. Heck is committed to looking out for his clients and focuses on finding the best option for their specific financial situation.
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What The Means Test Proves
Depending on how much disposable income is left after paying your allowed monthly expenses, the means tests decides if you have enough money to pay off some of your unsecured debts.
One example of unsecured debt is . If your income is higher than a certain amount defined in the means test, you may not be eligible for a Chapter 7 bankruptcy.
Only Certain Expenses Are Considered
This is where things get very technical, as only some types of monthly expenses are taken into consideration. So hiring a bankruptcy lawyer can be useful. The purpose of this part of the test is to determine whether your income is enough to cover your living expenses and repayment of your debts. A bankruptcy lawyer can give you legal advice on whatâs an allowed monthly expense and what isnât.
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Chapter 7 Income Limits
By meeting and reviewing your financial situation and records with an Atlanta bankruptcy lawyer, you could find out if you meet specific bankruptcy qualifications. The bankruptcy means test is used to determine if a debtors income is low enough for them to qualify for a Chapter 7 bankruptcy or if they will need to file a Chapter 13 bankruptcy instead.
The means test is used to prevent high-income debtors from filing Chapter 7 and being relieved of their debts altogether when they the income to pay for some or all of their debts over time.
Learning that there is an income limit may send some debtors into a panic however, those that qualify to file a Chapter 7 do not have to be penniless to do so. In fact, some debtors earn a significant income and still qualify due to their expenses and taxes.
There is no set limit of how much a debtor can earn to be eligible for a Chapter 7 bankruptcy instead, a standard formula is applied to each individual debtor. Without using the means test, you will not be able to know for sure whether or not you qualify for a Chapter 7 bankruptcy.
How Do I Pass The Chapter 7 Means Test
The Chapter 7 means test measures your “means” or ability to pay back creditors, and it takes many factors into account, including:
- your income from all sources
- the state you live in
- your family’s size
- personal and business debt, and
- your military status.
Each factor is used in a different part of a three-part test. Depending on your results, you might not need to complete each part.
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Secured Vs Unsecured Debt
When filing for bankruptcy, it is critical to understand that not all of your debts will be treated the same. Your debt will be labeled as either secured or unsecured.
With unsecured debt, your creditors have no right to seize your property if you fail to repay them. Some common examples of unsecured debt are credit card debt, medical bills, and court judgments. Some types of unsecured debt, like child support payments, must be paid in full.
Secured debt covers situations where your creditor can seize your property if you fail to pay. The two most common secured debt situations are when you have either a mortgage or a car loan.
If you choose Chapter 7 bankruptcy, most of your unsecured debt will be eliminated. But you will have three options for secured debt:
- Return it to the lender. In this case, you lose your property but are no longer responsible for the debt.
- Keep the property and continue your payments. If you can protect your equity in the property using an exemption and are current with your payments, you can often keep the property and continue paying down the debt.
- Purchase the property. In the unlikely situation where you can afford to purchase the property, you will be allowed to do so. However, the property must fall within one of the exemptions, and other requirements must be met.
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If You Passed The Tests
Even if you pass the Chapter 7 means test, you still may not qualify for Chapter 7 bankruptcy.
Aside from passing the means test, you should also be prepared to complete bankruptcy counseling, file a petition with your local bankruptcy court, and attend a creditor meeting, during which youll be required to answer questions about your debt, property and financial situation under oath. Read more about these requirements in our article about Chapter 7 bankruptcy.
Its also important to note that Chapter 7 bankruptcy isnt always the right move just because you qualify for it. You should consider the big picture and consult with a professional to find the best option for your situation.
If you decide to move forward with Chapter 7 bankruptcy, you can file with the help of a professional, by filling out the necessary forms yourself or using a service like Upsolve. Youll also have to take a credit-counseling class before you file.
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What Happens If I Pass The Means Test
If you pass the means test, good news you can continue on with the Chapter 7 bankruptcy process. That is not to say, however, that the work is over. Although it is generally a shorter process than Chapter 13, the Chapter 7 process can take months and is complicated. A trusted Chapter 7 lawyer can help you keep the process moving smoothly.
Failing The Means Test
If you fail the means test? The options are to file Chapter 13 or not file bankruptcy at all, Foohey said.
Chapter 13 bankruptcy is a longer and more complicated process, particularly if people have a lot of assets, including owning a house, that they want to keep.
People who file Chapter 7 have access to a relatively quick discharge of most of their debts, Foohey said. Chapter 13 requires people to pay their creditors a greater percentage of the debts owed through their income over a 3-to-5-year repayment plan.
She added, In many cases, the people who are forced to file Chapter 13 also have assets and debts that make Chapter 13 a better legal choice.
Michael Cibik, of Cibik & Cataldo, in Philadephia, said that Chapter 13 is a great alternative for those who arent eligible for Chapter 7.
Instead of getting all your debt discharged in Chapter 7, you would get the same debt discharged in Chapter 13, but would pay a percentage on the total, said Cibik, who is a former bankruptcy trustee and has handled more than 15,000 bankruptcy cases as an attorney. He said people who file Chapter 13 generally may only have to pay 10-20% on the dollar back to creditors of unsecured debt.
Because of the complexities involved with Chapter 13 bankruptcy, its a good idea to hire a bankruptcy attorney to help navigate the process.
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Three Significant Differences Between Chapter 7 Bankruptcy And Chapter 13 Bankruptcy :
- Chapter 13 bankruptcy has no income limitations, but certain income limits are put in place for those seeking Chapter 7 bankruptcy protection.
- An approved Chapter 7 bankruptcy plan eliminates many forms of unsecured debt, while Chapter 13 bankruptcy sets up a repayment plan.
Many other differences exist, and the Columbus, Ohio-based Chapter 7 bankruptcy attorneys with the Calig Law Firm discuss several below. You can have all your questions answered, and get help with your bankruptcy case, by calling us as 252-2300. We also take appointments for consultations online through this contact form.
