Chapter 7 Bankruptcy

Chapter 7 is called "liquidation" because a debtor's (the person filing bankruptcy) property that is not exempt is sold and the net proceeds are distributed to the debtor's creditors. At the end of the Chapter 7 bankruptcy, most unsecured debts and some secured debts are discharged, meaning that you do not legally have to pay them.

Please note that this information is general information only. Bankruptcy is very detailed and can be complex. Often, there are "exceptions to the rule". For specific information or if you have any questions of any nature whatsoever, talk with a lawyer licensed in your state.

If you are considering filing Chapter 7 bankruptcy, there are three questions to which you need answers:

1. Are you qualified?

The first part of qualification is to determine if your income is too high. If your income is too high, you cannot file Chapter 7 bankruptcy, but you can file a Chapter 13 bankruptcy.

How do you determine if your income is too high? There are two ways: (1) You need to check your income for the last immediate prior 6 months to filing bankruptcy against the median income of the residents of your state. If your income is less than the median income for your state, then you can file Chapter 7 bankruptcy. (2) If your income is higher than the median income of your state, then you need to pass the "means test". In this test, you take your income, deduct certain allowed expenses and determine your disposable income. If your disposable income is more than a certain amount, then you fail the means test and cannot file for Chapter 7 bankruptcy. The "means test" is designed to see if you have enough income to pay your creditors at least a portion of what you owe them.

To help determine if you pass the "median income test" or the "means test" go to http://www.legalconsumer.com. This online calculator does not require registration or any personal identifying information. Only your zip code is needed.

The second part of qualification concerns whether or not you have filed bankruptcy in the past. If you have obtained a discharge of your debts (a) under a Chapter 7 bankruptcy within the past eight years, or (b) under a Chapter 13 bankruptcy within the past six years, you are not qualified to file a Chapter 7 bankruptcy. Also, if you have had a bankruptcy case dismissed within the last 180 days, you are not qualified to file a Chapter 7 bankruptcy.

Finally, you cannot file a Chapter 7 bankruptcy if you have not paid your last year's taxes.

2. What property can you keep?

There are several classifications of property that you can keep.

First, some property is exempt from the bankruptcy. Exactly what property is part of bankruptcy chapter 7 exemptions is determined by state (varies state to state) and federal law. Generally, most personal property such as household goods, personal items, cars, tools of your trade, pensions, etc. are either completely exempt or a certain value amount is exempt. In most states, a certain value amount of a home is also exempt.

Second, you can keep property that is subject to a secured debt if (1) you have little or no equity in the property , and (2) you continue to the debt. For example, if you owe as much on your home or your car as the home or car is worth, then there is no need to sell it in bankruptcy because the home or car loan needs to be paid and there would be nothing left after paying the debt. To keep the property, you must continue to pay for it. Otherwise, your lender(s) will foreclose or repossess the property.

Property that is not exempt or has equity value may be sold in bankruptcy and the net proceeds distributed to your creditors.

3. What debts can be discharged?

At the end of a Chapter 7 bankruptcy, most of you debts are discharged so that you do not have to pay them. However, there are some debts that are not discharged. Unless the court rules otherwise, you will still have to pay child support, most taxes, and student loans. You will also have to pay any debts that the court determines to be non-dischargeable (generally for debtor fraud or malicious acts of the debtor). Additionally, you will have to pay secured debts (such as home or car loans) in order to keep the property.

Again, this information is general information and, often, there are "exceptions to the rule." It is best for you to talk with a lawyer licensed in your state.