A person or family whose primary financial difficulty stems from excessive, unsecured debt (i.e., credit cards, medical bills, civil judgments, signature loans, etc. ) is a usually a good candidate for chapter 7. Unlike a chapter 13, a chapter 7 has no provision to pay back any debt for which you are delinquent. Therefore, if you are delinquent on house payments or car payments a chapter 7 is not going to provide a solution to help you retain those assets in the face of foreclosure or repossession. For those who are either not delinquent on their house and vehicle payments, OR who wish to surrender their house or vehicle, a chapter 7 can provide an effective solution for eliminating unsecured debts. There are primarily three issues that must be evaluated to determine whether a person can achieve financial relief with a chapter 7:
First, a candidate must qualify for chapter 7 by proving that their annual household income is below certain amount based on their family size and the county in which they live. These amounts are based on the median income levels of all families living within that county. Generally, a family’s household income must fall below these amounts to qualify. These median income amounts are derived from IRS data each year and are published annually by the U.S. Trustee’s office on their website. There are some exceptions to these median income limits, but those involve a detailed analysis of a family’s specific debt burden, which is beyond the scope of this writing. The primary tool used for this detailed analysis is known as the “Means Test”. Candidates for chapter 7 MUST meet the income qualifications for chapter 7 or they will not be allowed to receive a discharge under chapter 7. Those who do not meet the income qualifications for chapter 7 are generally given the opportunity to file bankruptcy pursuant to chapter 13 instead.
Second, a candidate will need to determine if they own any property that is going to be “non-exempt” under the bankruptcy rules. This is important because usually, any non-exempt property must be surrendered to the Trustee shortly after chapter 7 is filed. Ultimately, the determination of whether property is non-exempt or not is made by the Trustee and/or the bankruptcy Judge. However, prior to filing, bankruptcy attorneys routinely spend time helping their clients determine if they own any property that a Trustee will likely consider to be non-exempt. Determining whether a specific piece of property is non-exempt in EVERY situation is very difficult and beyond the scope of this writing, but some typical examples of non-exempt property are listed below:
- Rental houses, vacation homes, time share property
- RVs, boats, campers, motorcycles (unless used as primary transportation)
- Extra motor vehicles, (typically any vehicle beyond the number of licensed drivers living in the household)
- Savings accounts, investments and securities (unless its part of a 401k, 403b, IRA, KEOGH or other special retirement account)
- Luxury items, such as high-value jewelry, collectibles, or art work
It is important to remember that non-exempt property does not prevent one from filing chapter 7. Rather, it becomes a factor in considering whether surrendering the property is worth the benefit of obtaining a discharge of all other unsecured debts.
Lastly, having the types of debts that can be successfully discharged (eliminated) in chapter 7 is essential to being a good candidate for chapter 7. Again, it is impossible to determine which specific debts can be eliminated in every situation without the help of an expert bankruptcy attorney. But for purposes of this writing, readers can consider this:
Debts that are almost always dischargeable: Credit cards, pay day loans, signature loans, medical bills, civil court judgments (unless fraud is involved), and property taxes for property you no longer own.
Debts that are sometimes dischargeable, depending on circumstances: Older income taxes, overpayments by social security or unemployment providers, monetary penalties in criminal matters, state taxes, and sales and use taxes.
Debts that are almost never dischargeable: Recent income taxes, student loans, child support, spousal support, and non-monetary criminal penalties.
If you are contemplating filing for bankruptcy, the experienced attorneys at
Fears Nachawati will be happy to discuss your options with you. For a free consultation, contact us here or call our office at 1.866.705.7584.