If you’re struggling with debt, it may be time to consider bankruptcy. A chapter 7 bankruptcy could help you get back on your feet, allowing you to eliminate or discharge your debt.
Before you file for bankruptcy, however, you must pass the “means test.” To do this, you must meet certain income guidelines.
What is Bankruptcy?
A bankruptcy is a legal proceeding that stops all CREDITORS from collecting debts until the court sorts them out. It also allows you to keep certain personal property – such as your car or home, depending on State and Federal law. However, the trustee in a Chapter 7 case will sell your nonexempt property and distribute the proceeds to creditors.
Some of your debt will be discharged – including credit card debt and most medical bills. Other debts will remain, such as your home mortgage, tax liens, child support and alimony. You will also be responsible for certain priority debts such as student loans and personal injury debts resulting from intoxicated driving.
Before filing, it is important to meet with a experienced attorney. He or she will calculate your disposable income and confirm that it is low enough to qualify for a Chapter 7 bankruptcy. If not, he or she can discuss alternative debt relief solutions.
How Does Bankruptcy Work?
When you file for Chapter 7, your creditors are forced to stop collection actions, including lawsuits, wage garnishments and harassing phone calls. This gives you the opportunity to take a breather and sort out your finances.
A successful Chapter 7 bankruptcy erases unsecured debt, such as credit card and medical bills, and allows you to keep key assets that are considered “exempt” from sale. Non-exempt property will be sold to pay your creditors.
To qualify for a Chapter 7, you must pass both Part 1 and Part 2 of your state’s means test. The means test focuses on your household income and whether you have enough disposable income to afford a repayment plan. You must also complete a credit counseling course from an agency on the court’s approved list. Your bankruptcy attorney can review your current expenses, document your allowable income and determine whether you pass the means test. If you do not, they can discuss alternative options with you.
Can I Keep My Property in Bankruptcy?
One of the fears people have about filing bankruptcy is that they will lose everything they own. However, this is usually not the case. The law allows you to keep certain assets, known as exempt property, that are not covered by liens from creditors. These exemptions typically include a home, vehicle, and personal possessions. The trustee sells any other nonexempt assets and gives the money to your unsecured creditors, such as credit card balances and medical bills.
In some cases, if an asset is not worth the cost of carrying out a sale (storage fees, sales costs, and liens), the trustee may abandon the property. This is especially true of expensive luxury assets, such as fur coats and hobby equipment, that are not covered by exemptions.
If you want to keep a nonexempt property, you can offer the trustee an equal value of another type of exempt property in exchange for keeping it. The trustee will often accept this offer.
Can I Get a Discharge of My Debts in Bankruptcy?
It is very hard to get a discharge of your debts in bankruptcy if you file without an attorney. One in three consumers who file Chapter 7 without a chapter 7 lawyer are denied a discharge of debts.
You must pass a means test to qualify for Chapter 7. The test compares your income to the median monthly income in your state to determine if you have enough disposable income to pay off your debts in a reasonable amount of time.
The trustee may sell your nonexempt assets, or property that you cannot keep, to repay your creditors. This includes vehicles, jewelry, collectibles and money in your bank accounts. The trustee is required to give you a list of all your assets and the value of those assets before they sell them.
Certain types of debt are not dischargeable in bankruptcy, such as child support, alimony, student loans and some taxes. You are also not allowed to file if you have filed for bankruptcy in the past six years or for the past eight years for Chapter 13. You can only file for Chapter 7 once in your life.