About Chapter 7 Bankruptcy
If you are being crippled by medical bills or high credit card debt, Chapter 7 may be a way for you to discharge those debts. Also called “liquidation”, because debtors are required to sell their non-exempt resources and distribute the proceeds to creditors. While the idea of selling your property is difficult, the key here is that debtors are only required to sell non-exempt resources. In many instances this means that debtors can file for Chapter 7 without losing any assets.
When a Chapter 7 petition is filed, all creditor collection activity will stop. There is an “automatic stay” that will protect you from the harassing phone calls; temporarily stop a foreclosure or eviction and permanently stop creditors from collecting their debts for those debts that are covered by your discharge
Chapter 7 cases are quite often resolved 4 months after the filing date. You will receive a Bankruptcy Discharge and your obligation to the discharged debts will be over. In your free consultation, we will be able to determine whether this it the right type of bankruptcy for you.
Chapter 7 Bankruptcy Eligibility
Chapter 7 is generally most appropriate for individual debtors, rather than businesses. But even among individuals, Chapter 7 is not always the best alternative; Chapter 13 bankruptcy sometimes provides a better remedy to those with a regular income. It is safe to say, however, that for debtors with little or no income, Chapter 7 is usually the most suitable type of bankruptcy. The one limitation is that debtors who have had their debt discharged under Chapter 7 or have completed a Chapter 13 plan within the past eight years cannot petition for Chapter 7.
Chapter 7 Bankruptcy Qualifications
When considering filing for bankruptcy, you must decide whether you have enough debt to justify filing for bankruptcy. The amount of debt is not as important as your inability to repay it. Some debtors file for bankruptcy with a relatively small amount of debt while others wait until they have accumulated exorbitant amounts of debt before filing. With the help of a qualified attorney, you should evaluate your debt, income, expenses and assets. A careful examination of this will help you determine whether Chapter 7 is suitable.
In most instances, Chapter 7 discharges the following types of debt:
- Civil judgments
- Credit card debt
- Medical bills
- Unsecured loans
It is important that you know which types of debt cannot be discharged under Chapter 7. The following debts fall into this category:
- Child support
- Secured loans such as mortgage and car payments
- Student loans
- Unpaid taxes
The question you should ask yourself is whether your dischargeable debt is high enough to justify filing for Chapter 7. If your debt consists mostly of student loans and unpaid taxes, Chapter 7 is probably not a suitable remedy. If your debt consists mostly of credit card debt and medical expenses, Chapter 7 could be appropriate for you. As a general rule, this type of bankruptcy is only suitable if your dischargeable debt outweighs your assets and you have little chance of repaying the debt.
You also need to factor in your assets. Some assets are exempt from liquidation, meaning that you can keep them. Other assets must be surrendered and sold during Chapter 7 to provide creditors with at least partial payment. In most instances, the following assets are exempt from liquidation:
- 401K plans
- A primary place of residence and the equity in the property
- Life insurance policies
- One automobile
- Personal effects such as household items and clothing
To learn more about the exceptions please visit the Arizona Bankruptcy Exemptions page.
Any non-exempt assets can be subject to liquidation. Debtors with a significant amount of non-exempt assets must be ready to surrender them if they file for Chapter 7.
The Means Test
The bankruptcy means test compares your monthly income of the state’s median family income for a family of your size. If your monthly income exceeds Arizona’s median income, you may not be able to file Chapter 7 bankruptcy. The means test is required if more than half your debt comes from consumer purchases rather than business, tax, or tort debts. Tort debts are debts for injuries or damages you caused to someone else. Debtors who pass the means test are presumed to qualify for Chapter 7. Debtors who do not qualify may still be able to file for Chapter 13.
How Does Chapter 7 Work
When a Chapter 7 petition is filed, all creditor collection activity will stop. There is an “automatic stay” that will protect you from the harassing phone calls; and it will temporarily stop a foreclosure or eviction and permanently stop creditors from collecting their debts for those debts that are covered by your discharge. A trustee is appointed to collect all non-exempt assets. The trustee then sells the non-exempt assets and divides the proceeds among your creditors. Keep in mind that exempt assets are not subject to forfeiture. Once the bankruptcy is complete all of your dischargeable debts will be discharged.
If you are concerned about losing certain assets in a Chapter 7 proceeding, you may be able to sign what is called a reaffirmation agreement. A reaffirmation agreement essentially permits you to keep certain property outside of the bankruptcy. By executing a reaffirmation agreement you can continue to pay down a mortgage or car payment to prevent forfeiture.
The most difficult part of filing for Chapter 7 is determining whether it is suitable to do so. An attorney can help you evaluate your circumstances. Call Skinner Law Group today at (480) 422-3440 to schedule your free bankruptcy consultation.