Chapter 7 Bankruptcy Laws

Liquidation - Straight Bankruptcy

There are recent changes to Chapter 7 bankruptcy laws that you must know if you are contemplating filing under this plan.  

Chapter 7 Bankruptcy Laws - Quick Facts

When people think of bankruptcy, they often mean Chapter 7, which is also commonly referred to as liquidation or straight bankruptcy.  If you file under Chapter 7, most of your debts are wiped out, and if you have some non-exempt assets, they may be divided up to pay your creditors.  You will not have a repayment plan.  Your debts simply just go away!

Chapter 7 is your best choice if:
  1. You don't have any or have very little money left over after you pay all your bills and expenses every month.
  2. Your income is less than your state's median income. (You may still pass the means test even if your income is over the median.)
  3. You have no or little assets to be liquidated by the trustee to pay to your creditors.
  4. You have not had an earlier bankruptcy case discharged within the last eight years.

Here are important facts about Chapter 7 Bankruptcy:
  • Eligible Debts - Chapter 7 bankruptcy laws eliminate most of your debts forever (even if you win the lottery after your debts are discharged).  Debts from the following can be eliminated:
    • Credit Cards
    • Medical Bills
  • Property - You may have to surrender some of your non-exempt assets to be liquidated to raise funds to pay off your creditors.  Most people who file under a Chapter 7 will have little or no assets for creditors to take.
  • Does not have a repayment plan (unlike Chapter 13)
  • You must pass a Bankruptcy Chapter 7 Means Test
  • Debts NOT Eligible for protection under Chapter 7 Bankruptcy laws - Debts such as government student loans, income taxes, alimony, and child support cannot be eliminated.  You are required to pay them back in ful

2005 Bankruptcy Reform Act (BARF)

Chapter 7 Bankruptcy Laws changed in 2005 when the Bankruptcy Reform Act, also known as BARF, was passed.  The most significant addition is the Means Test, which is basically a calculation to determine whether you are really able to come up with money to pay your creditors and should be required to do so.

Who is exempt from the Chapter 7 Means Test - The means test does not apply to you if you earn less than the median income in your state.  However, many who earn more than the median income are still able to pass the means test.  Basically, if you are flat broke with pennies left over every month to make payments on your debts, and assuming you have retained a good attorney for good advice, you may be able to pass the means test.  It will require quite a bit of work from you and your lawyer.

Chapter 7 Bankruptcy Laws and Good Faith - One thing to keep in mind is that some judges will also look at whether you are acting in good faith.  Some of the things they consider are:
  • Did you make large and unnecessary purchases that you did not have the ability to pay right before filing for bankruptcy.
  • Was your filing necessary because of a life-changing event such as unemployment, sudden serious medical condition, or other major setbacks that have caused you to file for bankruptcy protection.
  • Is your bankruptcy documentation and paperwork accurate and complete?  Do not make up numbers when filling up your paperwork.  You have to look up and include every single source of income and every expense you have.
If you fail the Means Test - You will have to file a Chapter 13 instead and repay a portion of your debts over a 5-year period.  You may  be able to convert to a Chapter 7 later down the line if you are not able to make your plan payments under Chapter 13.

Foreclosure and Bankruptcy

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