What Debt Can And Cant Be Erased
Chapter 7 bankruptcy can erase the following common debts:
Personal loans and payday loans
Judgments from credit cards and debt collection agencies
These debts are known as âdischargeableâ debts.
The moment someone files bankruptcy, a rule called the âautomatic stayâ goes into effect. This temporarily stops anyone from collecting any debts you owe them.
Chapter 7 bankruptcy cannot erase the following types of debts:
Child support and alimony
Recent tax debts and other debts you owe the government like fines
Student loans can usually not be erased
These debts are known as non-dischargeable debts.
Secured debts are debts that are backed by property, such as a mortgage backed by a house or a car loan backed by a car. If you want to keep your property that secures a debt, you cannot erase the debt in Chapter 7 bankruptcy. Before you file, you must also make sure youâre current on your debt payments. If youâre willing to give up the property, then Chapter 7 bankruptcy can erase secured debts.
You Can Lose Certain Types Of Property
One of the trade-offs for getting a bankruptcy discharge in a matter of a few months is the requirement to give up certain expensive items. Nonexempt property – the type of property the bankruptcy trustee can sell to pay creditors in a Chapter 7 bankruptcy case – is pretty rare.
If you own expensive property you donât want to lose, itâs best to speak to a bankruptcy lawyer. Then youâll know whether thatâs really a possibility and, if so, whether filing Chapter 13 is a better debt relief option for you.
Understand What Bankruptcy Means
Unexpected or lengthy illnesses, sudden or prolonged unemployment, and many other factors beyond your control can plunge you into debt that you might struggle to recover from. Insurmountable debt can make it impossible to meet your daily needs and can also lead to persistent pressure and anxiety.
When that happens, you can file for one of many chapters of bankruptcy, which will allow you to greatly decrease or completely dismiss overwhelming debt. Bankruptcy protection is a federal process and cannot be filed or tried in a state court. Federal bankruptcy laws will allow you to begin the credit and finance journey over with a new start.
In addition to removing debt for consumers and businesses, bankruptcy also provides some measure of protection for creditors who might still recover a portion of the debt they are owed through restructured or reorganized debt payments. Your lawyer can help you choose the right bankruptcy chapter and filing to fit your specific financial needs.
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Consequences Of Filing For Bankruptcy In Bad Faith
Filing for bankruptcy in bad faith can get you in trouble. The consequences of a bad faith filing can vary depending on the egregiousness of your conduct. But they can include dismissal of your bankruptcy, forever losing the right to discharge debts existing at the time of your filing, and loss of your nonexempt assets.
How Do You File Chapter 7 Bankruptcy
You can probably complete the process within six months. You’ll have to follow several steps.
You must complete pre-file bankruptcy counseling from a qualified nonprofit credit counseling agency within 180 days before filing.
Find an attorney:Before diving into the various forms required to file Chapter 7, find a qualified bankruptcy attorney to help. Its hard to find money for a lawyer when you need debt relief, but this is not a DIY situation. Missing or improperly completed paperwork can lead to your case being thrown out or not having some debts dismissed.
File paperwork: Your attorney will help with filing your petition and other paperwork. But its on you to gather all relevant documentation of your assets, income and debts. An automatic stay goes into effect at this point, meaning that most creditors cannot sue you, garnish your wages or contact you for payment.
Trustee takes over: Once your petition is filed, a court-appointed bankruptcy trustee will begin managing the process.
Meeting of creditors: The trustee will arrange a meeting between you, your lawyer and your creditors. Youll have to answer questions from the trustee and creditors about your bankruptcy forms and finances.
Your eligibility is determined: After reviewing your paperwork, the trustee will confirm whether youre eligible for Chapter 7.
Education course: Before your case is discharged, youll have to take a financial education course from a qualified nonprofit credit counseling agency.
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What Does Reaffirmation Of Debt Mean On A Credit Report
When you file for bankruptcy, all the accounts included and discharged will remain in your credit report for seven years. This will pull your credit score down, which will significantly affect your financial decisions down the road. Even if you pay some of your loans, the repayments wont appear on your credit report.
Reaffirmation can help you rebuild your credit after filing for bankruptcy. Once you reaffirm a debt, like a car loan or a mortgage, it will no longer be part of the bankruptcy-related information in your credit report.
If you managed to pay off the loan under the reaffirmation agreement in full, the positive account will remain on your credit report for 10 years. Likewise, making timely payments on your reaffirmed debt will help rebuild your credit.
Getting A Lawyer To Help You With Your Bankruptcy
Bankruptcy is a specialized area of law that is very complex. And the issues are not always apparent or simple. The bankruptcy laws changed in October 2005 to discourage many people from filing for bankruptcy. So the law became more complicated. And there are more situations where a mistake can result in your case getting dismissed. If your case is dismissed, the bankruptcy court often imposes a penalty of 180 days before you can refile, and in this time period a lot can happen. This is why it is so important to have a lawyer advise you and help you with your bankruptcy.
Find a lawyer who can help you work through the issues, alternatives you may have, and consequences of your choices.
- Pick a lawyer with whom you are comfortable, one who will allow you to ask questions and give you responses that you can understand.
- Pick a lawyer who either specializes in bankruptcy or does a large part of his or her practice in the field.
- Ask questions until you understand what your choices are.
- Don’t be afraid to interview a lawyer and leave without hiring him or her.
If you decide to represent yourself in bankruptcy court, read a guide for Filing for Bankruptcy Without an Attorney.
To find a good bankruptcy lawyer:
- Check state bar groups and specialization/certification programs for bankruptcy lawyers in your community.
- Ask other lawyers or tax preparers you know for recommendations.
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How Much Cash Is Exempt In Chapter 7
If you are concerned about any of your assets, you need to speak to an experienced bankruptcy attorney in your area. But what happens if you have a non-exempt asset?
Many people have questions and concerns about how much cash they can have in the bank when filing for bankruptcy.
If you declare bankruptcy, will you lose literally every dollar that you have in your savings? The answer is no: some cash can be exempted in a Chapter 7 case.
For example, typically under Federal exemptions, you can have approximately $20,000.00 cash on hand or in the bank on the day you file bankruptcy.
The vast majority of my clients have considerable less than $20,000.00 in the bank the day I file their bankruptcy. However, for the sake of my example, lets say, you had $23,000.00 in the bank the day I filed your bankruptcy. The Chapter 7 Trustee could technically take the amount over the exemption amount and pay that amount to your creditors.
So, you would keep $20,000.00 and the trustee would take $3,000.00 and give that to your creditors.
You would not owe your discharged creditors any more money and you still have a successful bankruptcy. While this example may seem extreme, I have worked on a bankruptcy where the individuals had more than $20,000.00 in the bank the day we filed their bankruptcy.
Whats The Difference Between Chapter 7 And Chapter 13 Bankruptcy
The major difference is time Chapter 7 takes 4-6 months Chapter 13 takes 3-5 years and money. You can have most, or all your unsecured debt discharged in Chapter 7 bankruptcy. In Chapter 13, some of your debt is forgiven, but only if you meet the conditions approved by the trustee and bankruptcy judge.
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Chapter 7 Bankruptcy Forms Explained
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In a Nutshell
The Chapter 7 forms packet consists of a voluntary petition, schedules, and statements. The term âpetitionâ is often used to describe the set of forms individuals filing for bankruptcy submit to the court. Here’s a walk through of all of them.
Written byAttorney Andrea Wimmer.
To file Chapter 7 bankruptcy, you have to submit the Chapter 7 bankruptcy forms to the court. There are about 23 official forms that are the same in Chapter 7 cases filed anywhere in the United States. Most bankruptcy courts also require certain local forms .
The Chapter 7 forms packet consists of a voluntary petition , schedules, and statements. The term âpetitionâ is often used to describe the set of forms individuals filing for bankruptcy submit to the court.
When Should I Declare Bankruptcy
You might consider filing for bankruptcy when your debts are such that you see no reasonable way to keep up with your payments. The purpose of bankruptcy is to give people a chance either to wipe out some of their financial obligations and start over with a clean slate, or to repay those obligations in a more affordable fashion.
However, to be clear, bankruptcy is not an option to consider if your debt is fairly new, or if you’re going through a temporary financial crisis that’s likely to improve . There are consequences associated with filing for bankruptcy, and it’s most certainly not a “get out of jail free” card. So you should really consider bankruptcy only as a last resort if you’ve tried paying off your debts but keep digging yourself deeper into a hole.
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Understanding The Means Test
Debtors must also successfully pass the “means test” calculation, another document that must be completed when you file for bankruptcy. This test was added to the Bankruptcy Code in 2005, and it calculates whether you’re able to afford or have the “means” to pay at least a meaningful portion of your debts.
The means test compares your household income with the median income for your state, and it compares your expenses to IRS Local Standardswhat people typically pay for similar expenses in your area.
You can only file Chapter 7 bankruptcy under very specialized exceptions if you fail the means test. Your alternative would be to file a Chapter 13 repayment plan case. The means test calculation requires completing and submitting Official Form 122A-2 with the bankruptcy court.
How To File For Chapter 7 Bankruptcy
You can choose to file for Chapter 7 bankruptcy on your own or hire an attorney to help. Some legal aid centers and nonprofit credit counseling agencies may also be able to offer you free assistance. Once you determine that you’re eligible, the process will be largely the same:
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Chapter 7 Vs Chapter 13 Bankruptcy
The main difference between Chapter 7 and Chapter 13 bankruptcy is that in Chapter 13 bankruptcy, you don’t immediately erase any debts. You propose a repayment plan based on your ability to repay certain debts. The bankruptcy trustee and all creditors review the Chapter 13 plan and, if itâs acceptable to all involved, the court confirms your repayment plan, which lasts three to five years.
Most people file Chapter 13 bankruptcy instead of Chapter 7 for two reasons. First, they fail the means test due to their high income and donât qualify for Chapter 7 bankruptcy. Second, they own a home they want to keep thatâs not covered by the Chapter 7 bankruptcy exemptions.
If you’re considering filing Chapter 13 because you don’t pass the means test, look at the reasons you aren’t passing. The lookback period for the means test is 6 months, so if you recently experienced a drop in household income, you might qualify for Chapter 7 in the near future.
How Do Exemptions Work In Chapter 7 Bankruptcy
When you complete your bankruptcy paperwork, you’ll list all of your property and any exemption that you can claim for each item. If the exemption covers the property entirely, you’ll be able to keep it. By contrast, the trustee will be able to sell any property not covered by an exemption and distribute the proceeds to your creditors.
But sometimes it can be more complicated. The exemption might partially cover the property. Or, you could have secured debt, such as a car payment or mortgage. In that case, the ensures that the creditor gets paid first.
Here’s how it works.
Suppose your car is worth $10,000 and your state allows you to exempt $5,000 in vehicle equity. Your outstanding car loan is $5,000. The trustee must pay the lender $5,000, leaving equity of $5,000. Because the bankruptcy exemption would protect all vehicle equity, the bankruptcy trustee would not sell the car.
If, however, your state only allows a $2,000 car exemption, then the trustee could sell your car and do the following with the proceeds:
- pay the lender $5,000
- pay you the $2,000 exemption amount
- pay sales fees and costs out of the remaining $3,000, and
- distribute any remainder to other creditors.
If the exemption scheme you’re using has a wildcard exemptionan exemption you can apply to any propertyyou can use it in addition to the vehicle exemption to protect more vehicle equity.
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Modern Law And Debt Restructuring
The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of the business.
For private households, some argue that it is insufficient to merely dismiss debts after a certain period. It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur. It has been stressed that debt advice, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditures must be equally provided during this period of rehabilitation . In most EU Member States, debt discharge is conditioned by a partial payment obligation and by a number of requirements concerning the debtor’s behavior. In the United States , discharge is conditioned to a lesser extent. The spectrum is broad in the EU, with the UK coming closest to the US system . The Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law in 2003 which provides for debt settlement plans that can result in a reduction of the debt or an extension of the payment period of maximally five years , but it does not foresee debt discharge.
Are All Of The Debtor’s Debts Discharged Or Only Some
Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523 of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons .
There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under chapter 13.
Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523 applies. The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.