Filing Chapter 7 Bankruptcy: The Right Move For You?
Chapter 7 bankruptcy will discharge most debts, including credit cards, medical bills and loans. Child support, spousal maintenance, most taxes, student loans and some divorce property settlements (or agreements to indemnify the other spouse), however, cannot be discharged. In order to qualify for Chapter 7, you need to either show that you are below the median income for a family of your size or pass a somewhat complicated “means test.” If you are over the median income, the means test, in a nutshell, compares your income to standardized expenses to see if you can pay $10,000 ($166.67 per month) or 25% to your unsecured creditors in Chapter 13.
Another requirement of the Bankruptcy Code is that you need to attend a consultation with a credit counseling program prior to filing and go through a budgeting program prior to getting your discharge. We generally recommend meeting with an attorney before going through a credit counseling program due to certain timelines the Act requires. We have an arrangement with one of the lowest-charging internet-based credit counseling agencies, where you can do it right at home from your own computer and the fees can be rolled right into your fee with us.
Chapter 7 bankruptcy is referred to as liquidation, which is somewhat of a misnomer, as fewer than 5% of people actually have assets liquidated. It’s my job to help you protect your assets under what is called “exemption laws.” There are different amounts for different types of assets, and to make it slightly more confusing, there are two sets of laws – federal laws and state laws. The debtor can make an election, and then all of their assets are protected under that set of laws. A debtor is usually permitted to change their mind and amend the other way at a later date if circumstances so warrant.
Don’t make this important decision lightly.
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Most debtors elect to protect their assets under the federal laws because there is a miscellaneous (aka “wild card”) exemption of up to $13,000, which is always useful for the following:
- Money in the bank as of the date of filing
- Tax refunds that might be going to the debtor, even if they will not be received until the following year
- Wages that have been earned through the date of filing but will be paid after the date of filing
The federal exemptions only permit an exemption for homestead equity of up to $25,000 (per spouse, if jointly titled), so debtors with more than that much equity would usually need to protect their homestead and other assets under the state laws. In that case, we would need to be much more particular about the three types of assets listed above plus other miscellaneous assets, such as boats, collectibles, firearms, etc., and some pre-bankruptcy planning is likely in order.
The easy way to qualify for Chapter 7 bankruptcy is by being under the median income, which is a figure based on household size that gets adjusted for inflation semiannually. The time frame that is used is the six months prior to filing. Household size is generally defined as the people who lived in the house as of the date of filing, regardless of whether they are related to the debtor. A debtor who is under the median is pretty much automatically qualified for Chapter 7, and a debtor who is over the median needs to go through the means test to see if they qualify. The means test is a governmental budgeting formula that involves going through your prior six months of income and deducting pretty much everything off the paychecks except voluntary retirement contributions. Then you get other deductions as well – some of which are your actual expenses, some of which are standardized expenses that may be more or less than your actual expenses – and then you come up with a bottom-line figure, called your disposable income. If that number is negative, zero or close to zero, you beat the means test and can qualify for Chapter 7. If you don’t beat the means test, then we look at timing issues to see if there is a different month when you might qualify, and we can also look to see if there are other legitimate expenses that could be added to your budget to beat the means test. And if there is simply no way to get you into Chapter 7 (or if there are other advantages to filing Chapter 13) then we can talk about Chapter 13 options. Of course, unlike some bankruptcy attorneys, I am always looking for non-bankruptcy alternatives to resolving your debt. If that makes sense for you, I will explain how and why.
If you want to keep your house or car, you will need to continue making any secured payments on them, although there are some rather complicated exceptions to that general rule. I will need to talk to you in more detail to determine whether it will be more beneficial for you to utilize state or federal exemption laws; this, in turn, will affect which assets you can keep. Before your case is filed, you will know exactly whether we think there is any realistic chance that you might have to turn over any assets.
Don’t Navigate Chapter 7 Bankruptcy Alone
As you can see, Chapter 7 bankruptcy can be complicated. You don’t have to attempt it alone. At Theisen Law in Anoka, Minnesota, attorney Tim Theisen can guide you through all stages of the process – including analyzing your financial picture to help you decide whether bankruptcy is right for you.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.