Chapter 7 Bankruptcy

Chapter 7 is the most common and widely discussed type of bankruptcy

Chapter 7 is the most common and widely discussed type of bankruptcy, otherwise known as a “No Asset” bankruptcy.  The concept of a Chapter 7 is that as long as an individual or a couple, qualify for a Chapter 7 discharge, all unsecured debts get discharged.

Chapter 7 Bankruptcy works well for an individual or a couple that have primarily unsecured, consumer (most commonly credit card) debt, whose income qualifies by passing a Means Test, provided as part of the Chapter 7 Bankruptcy petition, and based on the amount of family members in a household, and the value of whose assets does not exceed the limitations set by the state or federal bankruptcy exemptions, qualify for a Chapter 7 Bankruptcy discharge. For Debtors the majority of whose Debt stems from business guarantees or obligations, the means test limitation of income, is largely inapplicable. 

The Chapter 7 Bankruptcy exemptions allow a Debtor or Debtors to retain their primary residence, as long as the amount of equity does not exceed the state bankruptcy exemption per person.  Similarly, bankruptcy exemptions may be used to protect paid off vehicles, or those with equity, funds contained in a bank account, an IRA, a 401(k), among many others.  The determination of the applicability of exemptions must be made by a knowledgeable attorney, on case by case basis, as individual circumstances are crucial.

In the event that there is a difficulty in making timely mortgage payments as well as unsecured debt, a mortgage modification may be obtained as part of the Loss Mitigation program adopted by the Federal Bankruptcy Court, while the protection of the automatic stay is extended, in most cases, until a mortgage modification is obtained.

 

Credit cards, personal guarantees of business debt, many types of court claims, medical bills, certain tax debts, deficiencies for returned or repossessed vehicles, cell phone debts, and many others, are debts dischargeable in Chapter 7 Bankruptcy. 

 

It is very rare that a Chapter 7 Discharge is denied- Some possible causes of non dischargeability of unsecured debt are fraud, misrepresentation, a criminal or intentionally malicious act, breach of fiduciary duty, and fraudulent conveyances, among others.  In cases where there is a high likelihood of  an adversarial proceeding for non dischargeability, a thorough evaluation by a qualified bankruptcy attorney, prior to filing, is absolutely essential.

Some common questions asked about Chapter 7 Bankruptcy-

Chapter 7 bankruptcy has no bearing on immigration status of the individual Debtor.  The only requirement is that the individual Debtor must have a valid social security number and file taxes in the US.

 

Even though a chapter 7 Bankruptcy gets reported on one’s credit report for up to 10 years, it is absolutely untrue that you can not obtain credit cards, get a new financed or leased car, start a new business or even buy a home during this time.  Various banks offer programs that allow a bankruptcy debtor to obtain a mortgage 24 months after a bankruptcy discharge is issued, to finance a car right after a bankruptcy filing (at a higher interest rate), or to lease a car approximately 3-6 months after the discharge. 

 

Once unsecured debts are discharged- the discharged debt is not taxable as one’s income, there is absolutely no tax liability for debt discharged in chapter 7 bankruptcy.

 

Any income tax debt for which a final acessment was made 3 years prior to the bankruptcy filing and which was not a result of a fraudulently filed tax return, among other exceptions, is dischargeable in a Chapter 7 Bankruptcy. From the moment that a Chapter 7 Petition is filed, an automatic stay is in effect and the Debtor is protected from any and all collection efforts by the creditors.  Your account and salary can not be garnished, you will not receive any further collection calls or letters, no new lawsuits can be initiated against you for the purpose of debt collection, no judgments can be obtained and no liens can be placed on your properties. 

Answers to some of the most common questions asked about chapter 7 bankruptcy

A Chapter 7 bankruptcy case is retrospective, not prospective, which means that any property or business  obtained 6 months after discharge, as long as the Debtor was not entitled to the assets before or during the pendency of the case, are not reachable by the creditors in the preceding bankruptcy.

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