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What is Chapter 7 Bankruptcy

The United States Bankruptcy Code offers several different bankruptcies. Two of those bankruptcies are available to consumers, chapter 7 and chapter 13. Chapter 7 bankruptcy, which is often called straight bankruptcy, is where the debtor goes to the court and requests that his/her unsecured debts be discharged. In a Chapter 7 Bankruptcy the debtor is going to be responsible for paying for his own car and any other secured items for which they would like to keep. But they are asking that their unsecured liabilities be discharged by the court.

Chapter 7 bankruptcy typically takes from start to finish, about 180 days. And then the court grants a discharge to the debtor. Typically lower income or very fixed income people qualify for Chapter 7 bankruptcy.

See the Chapter 7 Median Income Levels here.

If filing for bankruptcy is an opportunity for a debtor to emerge out of a financial crisis and start afresh, then Chapter 7 of the Bankruptcy Code is the way to achieve this end relatively faster. Under Chapter 7 of the Bankruptcy Code, the bankruptcy rule states that all non-exempt property of the debtor is sold and the proceeds of the same are distributed to the creditors.

In most cases where Chapter 7 is brought into force the debtor has no assets to lose, therefore the fresh start takes place relatively faster.

Who Can File For A Chapter 7 Bankruptcy?

The reverse of this question would be more appropriate to answer. Debtors engaged in business would usually not like the prospects of liquidation and Chapter 11 might be a better option for such individuals associated with corporations and partnerships. Also, individuals with regular income if in a debt situation would be better suited to file a Chapter 13 bankruptcy.

Also, any person who has been granted a Chapter 7 discharge (or completed a Chapter 13 plan) within the last 8 years, cannot file for a Chapter 7 bankruptcy plan.

How to Start the Chapter 7 Process

If you are ready to find out if Chapter 7 Bankruptcy can help improve your financial situation, the best place to start is our Free Case Evaluation form. Complete the form below and an attorney near you will call you to discuss your options. Bankruptcy law differs from state to state so it's important that you discuss your case with a local bankruptcy attorney. The form only takes a few minutes to complete, so get started now!

How Does Chapter 7 Bankruptcy Work?

A trustee is appointed who collects all non-exempt property, sells the assets and distributes proceeds from this sale to appropriate creditors. Chapter 7 is different from other bankruptcy filings because the debtor needs not make a payment to the trustee.

Even though in some cases this would mean that you will lose all your assets, this need not always be the case. It is strongly recommended that if you are apprehensive and feel you will lose your assets, discuss the matter with your Bankruptcy Attorney.

An added advantage with Chapter 7 bankruptcy is that by signing a reaffirmation agreement a debtor can continue to pay for a car loan or a mortgage on their home. This agreement is in place because as per the US Government Bankruptcy Code a debtor could be allowed to retain some or all of his property.

How Likely Are Creditors to Object to Discharge?

Creditors have the right, but not always the intent, to challenge bankrupcty discharge. That does not mean a creditor who is owed money on a particular bill will not show up to a 341 hearing, a court-order meeting of the debtor with a bankruptcy trustee and any creditors who choose to attend.

"A creditor might object to your Chapter 7 case if you ran up a lot of credit card bills in the six months to a year prior to filing. Or, your bankruptcy can be challenged if you misrepresented your financial affairs in a personal financial statement," writes Georgia attorney Jonathan Ginsberg on his website, AtlantaBankruptcyAttorney.com.

Generally, an attorney or a paralegal representing a creditor who attends a 341 meeting will ask if the debtor has assets not listed in their bankruptcy petition. They may also ask to see proof of insurance on a car or home, usually the largest property owned by Chapter 7 filers.

If a creditor does challenge the discharge of a debt, Ginsberg states that the recourse is to negotiate a partial payment plan for that particular debt or to convert the case to a Chapter 13 Bankruptcy, which requires a court-ordered repayment plan over several years.

Instead of representatives of a large credit card company or medical facility, legal experts say those who are most likely to challenge a bankruptcy discharge are individuals who may have lent money to the debtor or a local business creditor.

In some cases, a creditor may take the additional step of filing a lawsuit within the bankruptcy to object to the discharge of a debt. That is called an adversary proceeding, and often is based on a claim of fraudulent behavior by the debtor, such as lying on a credit card application.

New York attorney Craig Robins writes on LongIslandBankruptcyBlog.com that creditors aren't likely to take their complaint this far in a Chapter 7 case because the burden of proof falls on them, they have to pay court and attorney fees to challenge the bankruptcy and there is a considerable amount of legal work involved in such complaints.

In New York, Robins has found, "The court expects the lawyers to do the same amount of legal work whether the case involves a $5,000 consumer credit card debt or a $1,000,000 Chapter 11 [business bankruptcy] turnover action."

How much does Chapter 7 bankruptcy cost?

  • Filing fee of $335 - Filing fee may be waived or a payment plan allowed if you can demonstrate to the court that your income is 150% below the poverty level.
  • Counseling Course $15- $70
  • Financial Management Course $15- $70

One of the most expense costs of filing a personal bankruptcy is hiring a bankruptcy lawyer. If you have a simple no-asset case you may be able to do it without the assistance of a bankruptcy attorney, but most filers will need legal assistance.

Bankruptcy lawyers may charge as little as $750 for a simple, Chapter 7, no-asset case. But they will expect full payment before they file the bankruptcy petition. Hiring a lawyer for a chapter 13 bankruptcy will be more expensive but the bankruptcy attorney may allow you to include the payments in your bankruptcy plan.

These costs were pulled in 2011. Costs may have changed slightly since then. If it makes sense for you to file bankruptcy with the assistance of an attorney, please complete our free, no obligation, evaluation form.

What Are Allowable and Reasonable Expenses?

Unlike Chapter 13 Bankruptcy, which requires a repayment plan over several years, those who file under Chapter 7 must give up any property to pay back creditors that is not covered by court-sanctioned "exemptions." Such exemptions apply to one's home, car, furniture and other possessions the debtor needs to maintain a normal household.

"You need only give up your 'non-exempt' property, which for most people, once the proper exemptions are applied, amounts to nothing. In other words, in many cases much or all of your property will be exempt," according to BKMass.com.

In addition, the court recognizes "allowable and reasonable expenses" that everyone, including debtors, need to live on. As a result, a means test outlined in the bankruptcy regulations will measure how much of their income debtors will be allowed to keep to pay for their living expenses.

Beyond household expenses such as utilities and housing costs, reasonable expenses may include the cost of health and disability insurance, support of dependent children under age 18 and the care of an elderly or ill member of the family.

The two-part means test first applies a formula for exemptions to determine if the debtor can afford to pay back creditors for unsecured debt, such as credit cards or medical expenses. The second part of the test is based on how the debtor's income compares to the average income for the state in which they live.

If a debtor's income is above the average in their state and they are able to pay at least 25 percent of their unsecured debt, they will not qualify for a Chapter 7 Bankruptcy and may be allowed to file under Chapter 13 instead.

Some special considerations covered by the bankruptcy code take into account whether the debtor is an active duty military service member, a low-income military veteran or someone who has a serious medical condition.

Even in cases in which a debtor's income falls below the median level, their ability to fund a Chapter 13 repayment plan is considered. "This common-sense nugget at the heart of the bankruptcy system states that if you can afford to pay none of your debts, you pay none of your debts, but if you can afford to pay some of your debts, you pay some of your debts," states BankruptcyLawInformation.com.

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Current Median Income Levels

State Single Earner 2 People 3 People 4 People *
Alabama$41,370$49,806$55,289$65,381
Alaska$60,079$82,156$85,867$95,010
Arizona$43,749$54,236$57,927$67,800
Arkansas$38,530$47,017$51,773$58,149
California$49,185$63,745$67,817$78,150
Colorado$51,552$67,129$70,827$84,998
Connecticut$59,582$72,352$87,071$107,360
Delaware$51,686$61,849$74,300$84,179
District of Columbia$48,638$77,117$77,117$77,117
Florida$42,036$51,584$57,052$66,461
Georgia$40,985$52,827$57,858$68,066
Hawaii$61,107$67,463$80,681$88,217
Idaho$42,918$51,791$55,949$61,353
Illinois$47,469$61,443$72,342$83,546
Indiana$42,716$53,074$61,056$73,020
Iowa$43,792$61,104$67,062$81,219
Kansas$45,246$59,610$65,010$74,804
Kentucky$41,330$48,355$57,617$68,680
Louisiana$41,016$49,279$57,289$72,828
Maine$41,908$54,267$61,527$75,290
Maryland$59,475$76,489$88,221$105,382
Massachusetts$55,356$69,673$85,637$106,812
Michigan$44,504$53,640$62,973$76,622
Minnesota$50,121$65,503$79,750$93,294
Mississippi$35,213$44,116$46,583$58,182
Missouri$41,700$51,940$61,119$71,550
Montana$44,074$54,839$61,043$67,614
Nebraska$42,446$60,389$65,804$78,363
Nevada$42,988$55,467$58,399$68,560
New Hampshire$55,804$67,659$81,709$94,432
New Jersey$60,265$70,845$89,413$105,737
New Mexico$40,722$53,385$53,385$61,837
New York$48,840$60,743$71,706$88,156
North Carolina$40,412$51,857$56,782$69,370
North Dakota$47,629$67,024$76,620$88,887
Ohio$43,276$53,551$62,134$77,367
Oklahoma$41,544$52,995$57,087$63,419
Oregon$46,304$57,182$64,107$71,508
Pennsylvania$48,200$56,946$71,703$84,396
Rhode Island$47,742$62,190$71,977$88,389
South Carolina$39,983$50,679$54,028$66,561
South Dakota$40,427$57,383$57,383$73,089
Tennessee$40,977$50,169$56,091$66,846
Texas$42,223$57,730$60,520$70,824
Utah$52,021$58,595$66,552$72,274
Vermont$46,494$61,671$72,558$82,047
Virginia$52,436$67,021$75,044$91,859
Washington$52,384$65,802$74,428$84,786
West Virginia$43,554$46,658$54,097$66,009
Wisconsin$42,969$58,786$68,489$82,350
Wyoming$49,721$64,086$75,456$80,477
Commonwealth or U.S. Territory
Guam$38,973$46,598$53,101$64,259
Northern Mariana Islands$26,171$26,171$30,448$44,784
Puerto Rico$23,069$23,069$23,861$29,823
Virgin Islands$30,921$37,163$39,624$43,412
* Add $8,100 for each individual in excess of 4.

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