By Mike Wallace, Bankruptcy Attorney, serving clients in all of East Texas, including Lufkin, Nacogdoches, Palestine, Jacksonville, Tyler and other surrounding communities
I have previously outlined the basics of Chapter 13 bankruptcy filing, so I am going to give an illustration that might help someone understand Chapter 7 bankruptcy.
First, Chapter 7 bankruptcy is means tested, so Debtors have to qualify to file a Chapter 7 bankruptcy based on their income level.
It should be pointed out immediately that Social Security income does not count toward a Debtor’s qualification for Chapter 7 bankruptcy.
The Internal Revenue Service has calculated certain median incomes throughout the United States based on geographical location.
If the Debtor’s median income is below that calculation, then the Debtor is qualified to file a Chapter 7 bankruptcy. If the Debtor’s income exceeds the median income, then additional calculations are made based on a means test that might still allow the Debtor to qualify to file a Chapter 7.
If business debt exceeds all of the Debtor’s personal debt, then there is an automatic qualification so to speak,
Chapter 7 bankruptcy is designed to give a Debtor a fresh start from unsecured debt such as: credit card debt; medical bills; deficiencies related to foreclosures or repossessions; payday loans; signature loans and judgments.
Often, Chapter 7 bankruptcy is referred to as “liquidation bankruptcy,” because to the extent there is property that the Debtor owns that cannot be exempted, then that property is sold by the Trustee appointed to the case and is paid to the unsecured creditors.
For the sake of this discussion and illustration, you should know that the overwhelming majority of cases are referred to as “no asset” cases. In other words, the bankruptcy law allows a Debtor in a Chapter 7 case to use exemptions that are provided for under the law to protect property from liquidation.
For example, a person’s home, vehicle, retirement accounts and personal household goods are generally protected and can be kept by the Debtor.
The advantage to Chapter 7 bankruptcy is that it is a fairly quick process, so the Debtor is allowed an opportunity to get a fresh start without having to make payments as in a Chapter 13 case.
The Debtor receives a “discharge” of all unsecured debt in a Chapter 7 case, which meas they are no longer liable for that debt. The Creditor who holds the debt cannot take any further action to collect the debt once the bankruptcy case is filed.
Certain debts, such as student loan debt, are for the most part non-dischargeable in a Chapter 7 bankruptcy. Contrary to what a lot of people believe, Chapter 7 bankruptcy generally allows a person to rebuild their credit much faster than if they did not file bankruptcy.
To the extent that a Debtor has a mortgage on a home or a loan on a vehicle, then Chapter 7 bankruptcy allows the Debtor to keep the home or vehicle if they so decide. Of course if the payments on such secured debts can no longer be afforded, then the Debtor can surrender the property and receive a discharge of that debt.
All of the above information is for illustration purposes to allow a better understanding of Chapter 7 bankruptcies. Every situation is different and there are special rules that come into play in any given Chapter 7 case. For example, income taxes owed by a Debtor might or might not be dischargeable in a Chapter 7 bankruptcy.
If you have additional questions about Chapter 7 bankruptcy or any other financial situation that you might find yourself in, then give me a call at (903) 683-2018 and we can discuss your situation at no obligation to you.
As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation. Bankruptcy, as many other areas of the law are very case or fact specific. I pride myself on giving you the answers to your questions that are based on your individual circumstances.
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