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BANKRUPTCY 

CHAPTER 7

 

A Chapter 7 is often refered to as a liquidation .  The primary focus of a liquidation is on assets and liabilities.  However, to qualify for Chapter 7 the Debtor's income has to be below the median for the household size.  

 

 

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Debts

Priority Debts are debts that generally cannot be eliminated or discharged in bankruptcy. These include : Taxes and back child support or maintenance. Some tax debts may be dischargeable. Please see the blog post regarding tax dischargeability.

 

Secured Debts are debts that are tied to particular types of property. Home mortgages and car loans are typical examples of secured debts. You may choose to return the secured property or "reaffirm" the debt by agreeing to continue making payments in exchange for keeping the property. The creditor can ask that the property be returned if you are substantially behind in your payments.

 

Unsecured Debts are not tied to any property. Credit cards and doctor bills are typical examples. Generally, these debts are eliminated or discharged in bankruptcy. However, there are certain exceptions. If the debt or charge was made less than 60 days before you file bankruptcy, the debt might survive the bankruptcy. Also, if you charged a debt at the time you knew you could not pay it, the Court might rule that it survives the bankruptcy. Some other unsecured debts also survive the bankruptcy.

PROPERTY

When you file bankruptcy, your property becomes subject to the Bankruptcy court. You can protect certain kinds of property by exempting them. Some states limit you to their particular lists of exemptions, other allow you to choose either state or federal exemptions. The following are based on Federal rules:

 

The family home is protected under homestead rules. $23,675 in equity can be protected per debtor, or $47,350 per husband and wife, as joint debtors. However, the homestead will not protect against the existing mortgage or other filed liens.

 

One Automobile for each person can be protected up to $3775 in equity.

 

Household furnishings can be protected up to $12,625 in value for each debtor, so long as no single item can be sold for more than $600. The exemption also protects clothing.

 

Jewelry can be protected up to $1,600 in value for each debtor.

 

Tools can be protected up to $2,375 in value for each debtor.

 

Miscellaneous Property can be protected under a general exemption. This exemption uses the unused homestead, up to a maximum of $13,100 for each debtor. It can be applied to any other unprotected property or combination of properties.

Income/Expenses

You must disclose your income and expenses. If your income for the last 6 months exceeds the average for your size family, the Trustee may move to dismiss your case or request that your case be converted to Chapter 13 to prevent a dismissal.

 

This is commonly referred to as the "Means Test." The following website has a quick calculator to get you started: Click Here.

 

CMI is your current monthly income. The test has 3 parts. The above is the first part. If your income exceeds the average, we move to the second part or the test, which allows for various deductions, such as taxes, mortgage payments, medical expenses, daycare, etc. If your Disposable Monthly Income (the amount left over after the deductions) is more than $150, you will probably need to consider a Chapter 13.

Disclosures

You are required to disclose certain transactions that occurred before you filed bankruptcy, such as property sales, substantial debt payments, gifts to others. This prevents potential fraudulent or preferential transfers.