What is a Chapter 7 Bankruptcy?
A Chapter 7 Bankruptcy is the the single most common type of bankruptcy filed in the United States. It is also called straight bankruptcy or liquidation bankruptcy. Although it's not the only option, it's what most people think about when the word "bankruptcy" comes to mind. It is available for Individuals, as well as Corporations.
Chapter 7 bankruptcy is a legal process that is intended to eliminate many, or all, your debt, specially unsecured debt, like medical bills, credit/store cards, utility bills, some personal loans, payday loans and more. This quick court process, which most people prefer over a Chapter 13 bankruptcy (that approach requires a three- to five-year repayment plan), could free you from debt and give you the fresh financial start that you need.
For a Corporation, a Chapter 7 signifies the stop of all operations and the beginning of the process of liquidation (or going out of business).
Let's first look at the Individual Chapter 7 Bankruptcy.
The whole Chapter 7 bankruptcy process takes about four to six months, costs $335.00 in filing and administrative fees (in addition to the attorneys' fees), and commonly requires only one trip to the courthouse. You must also pay for and complete a credit counseling course with an agency approved by the United States Trustee, which typically costs $20.00. Other costs might be the cost of pulling your credit reports and the cost of requesting IRS Tax Return Transcripts.
Who can File a Chapter 7
If you answer YES to any of these questions, you might benefit from a Chapter 7 Bankruptcy:
- Have you recently lost income?
- Are you behind on your bills?
- Are collectors sending you notices via the mail or phone?
- Are you being threatened with lawsuits?
- Are you unable to catch up on past-due bills?
- Are you having trouble providing your family with the basics?
That said, you will not be able to file a Chapter 7 Bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan.
To determine whether you are eligible, you needs to pass something known as the “means test.” Under the means test, if your average household income is less than the median income of your state, you automatically qualify. Your average household income is determined by averaging your monthly income over the last six calendar months. If you are over the median income limit and your income has declined over the last six months, then waiting one or more months might bring your income under the median level for Florida. Once you determine your average monthly income you multiply that by 12 to determine your annual income for the purpose of Florida median income test.
In Florida the median income is as follows:
1 Member Household - $41,334.00
2 Member Household - $51,839.00
3 Member Household - $53,952.00
4 Member Household - $63,196.00
5 Member Household - $71,296.00
If your gross household income exceeds the median, you might still be eligible because the second step of the test allows you to deduct certain expenses, such as income taxes, health care premiums, and childcare costs, from your gross income.
Do I loose all my assets if I file a Chapter 7 Bankruptcy?
Not necessarily. In a Chapter 7 bankruptcy you wipe out your debts and get a “Fresh Start”, but it's a liquidation, so the trustee collects all of your assets and sells any assets which are not exempt, in order to pay your creditors.
If, after the creditors meeting, the trustee determines that you have nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee may "abandon" the property -- which means that you get to keep it, even though it is nonexempt.
On the other hand, exempt property are not subject to liquidation (which means the trustee cannot take it away). Most frequently used Florida property exemptions include:
- Your Homestead property;
- Personal property up to $1,000. Personal property can include such items as furniture, art, and electronics;
- Prepaid medical savings account and health savings account deposits;
- Funeral costs per Florida's Preneed Funeral Contract Consumer Protection Trust Fund;
- You can exempt up to $1,000 in motor vehicle equity, more if you are married and filing jointly;
- Wages of a head of the family are entirely exempt up to $750 per week, or the greater of 75% or 30 times the federal minimum wage. This applies to paid and unpaid wages and wages deposited in a bank account during the last six months;
- Up to $4,000 of personal property as exempt if you do not use the homestead exemption;
- veterans benefits, social security benefits, reemployment assistance, and local public assistance benefits, like workers compensation and unemployment compensation benefits; and
- The following types of pensions and retirement funds are exempt in Florida:
- ERISA qualified retirement plans and pensions (including 401(k)’s, 403(b)’s, profit sharing and money purchase plans, SEP and SIMPLE IRA’s, and other defined benefit plans) are fully exempt;
- IRA’s and Roth IRA’s are exempt up to $1,171,650;
- Public employee retirement benefits;
- State and County officers and employees retirement system benefits;
- Firefighter pensions;
- Municipal police pensions; and
- Teachers’ retirement benefits.
What is the Discharge?
After 60 days following the 341 meeting of Creditors, if the case is a "no-asset" case, all your debt are eliminated (discharged) by the court, with the following exceptions:
- child support, most tax debts, and student loans, unless the court rules otherwise; and
- debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).
By comparison, asset cases remain open until all assets are distributed, which can take several months or more, depending on the complexity of the case.