Chapter Seven Bankruptcy Discharge

A Chapter Seven Discharge Gives You a Fresh Start

Chapter Seven Bankruptcy

Chapter Seven and Thirteen are the two sections of the Bankruptcy Code that apply to individuals. (Chapter Twelve is for small farmers and is similar in many ways to Chapter Thirteen).

Under Chapter Seven, the debtor seeks to discharge certain of his debts in return for releasing all his non-exempt property to the trustee to sell. An automatic stay of all lawsuits and debt collection efforts is granted when you file a Chapter Seven application.

Exemptions are determined by Federal or state law. The Federal bankruptcy exemptions are as follows:

[Married couples would double the amount of the following federal exemptions]

• Homestead - Real property, including co-op or mobile home, to $17,425; any unused portion of homestead up to $8,725 may be applied to any property
• Life insurance payments for a person you depended on or needed for support
• Life insurance policy with loan value in accrued dividends or interest up to $9,300
• Unmatured life insurance contracts, except credit life insurance policies
• Alimony and child support
• Pensions and Retirement Benefits, federally qualified benefits needed for support
• Household goods and furnishings up to $9,300 total
• Health Aids
• Jewelry up to $1,150
• Lost earnings payments
• Motor vehicle worth up to $2,775
• Personal injury compensation payments up to $17,425
• Wrongful death payments
• Crime victims' compensation
• Public assistance
• Social Security payments
• Unemployment compensation
• Veterans' benefits
• Tools of trade: books and equipment up to $1,750
• $925 of any property, plus up to $8,725 of any amount of unused homestead exemption

State exemptions vary widely from state to state. For example, in Missouri only $8000 equity in real estate and $1000 in personal goods are exempt.

In Texas the debtor’s home, no matter the value, a car and $60,000 in personal property is exempt.

Florida has a similar homestead exemption. You can keep your $35 million dollar mansion and still have your debts discharged.

Find a local bankruptcy attorney to represent you at these hearings, which I highly recommend. The issues are complex and bankruptcy reform has made them more so.

The Supreme Court has ruled that the assets of IRA's and other retirement plans and tax sheltered college savings plans (529 plans) are protected.

One of the reasons you should not wait to the last moment if you have to file is the allow time for proper planning of your bankruptcy. A competent bankruptcy lawyer may be able to legally convert non-exempt assets to exempt ones before the filing.

Most Chapter Seven cases are no asset cases, meaning there are no non-exempt assets in the debtor’s estate.

Chapter Seven is used by people who have little non-exempt property. All unsecured debt, mostly credit card debt is discharged. This means the creditor can no longer attempt to collect the debt in any manner or he will risk being held in contempt of court.

A court can dismiss a Chapter Seven case filed by an individual whose debts are primarily consumer rather than business related, if the court finds that the case would be a substantial abuse of the provisions of the law.

A number of courts have concluded that a Chapter Seven case may be dismissed for substantial abuse when the debtor has the ability to propose and carry out a workable and meaningful repayment plan under Chapter Thirteen.

Among the grounds for denying a discharge under Chapter Seven, are the failure to keep or produce adequate books or financial records; lack of satisfactory explanation of any loss of assets; perjury or failure to obey a lawful order of the bankruptcy court; and fraudulent transfer, concealment, or destruction of property that would have become part of the bankruptcy estate.

If you have secured property, like a car that you want to keep, you can reaffirm your debt in court. The lender will not try to seize the asset if you continue to pay under you original contract.

Not all debts can be discharged by the bankruptcy court. Debts which cannot be discharged in a bankruptcy proceeding are alimony, child maintenance and support obligations, certain taxes, including the last three years income taxes, debts for educational benefit overpayments or federal student loans, debts for willful and malicious injury, debts for death or personal injury caused by the driving while intoxicated from alcohol or other substances, and debts from criminal restitution orders.

If you have these debts and they are not satisfied by the sale of your assets, you are still responsible for them after the bankruptcy case has been concluded.

Debts for money or property obtained by false pretenses, or through fraud, embezzlement or misuse of funds while acting as a fiduciary; debts for willful and malicious injury to another entity or to the property of another entity; and debts arising from a property settlement agreement incurred in connection with a divorce or separation are discharged unless a creditor convinces the court to have such debts declared exempt from discharge.

So, if your major source of indebtedness is student loans or any of the other things listed above, bankruptcy will do you no good. Bankruptcy experts suggest that at least 50% of your debts should be dischargable to make bankruptcy worthwhile.

The court may revoke a chapter 7 discharge if it is proved that the discharge was obtained through fraud by the debtor or if the debtor hid property from the trustee that should have been part of the debtor’s estate.

Changes to the Bankruptcy Law Effective October 17, 2005

Lenders, especially credit card companies, feel that their customers have been abusing Chapter Seven. They have convinced the Congress and the President that amending the law will prevent abuse and lower the cost of credit for their paying customers.

In March 2005, an overhaul of the Bankruptcy law was been accomplished.

Debtors will now have to undergo credit counseling, at their expense, before filing. At this counseling, it will be determined if the debtor can file under Chapter Seven or Chapter Thirteen.

In order to be pushed into Chapter Thirteen, the debtor must have an income above the mean income for his state and the ability to pay at least $6000 over the next five years to his creditors.

Although some claim the credit card companies will make a massive windfall from this change, others feel that things will not be much different, mainly because most debtors who are filing now are well below their state’s mean income level.

One change that may be more valuable to the lenders is a provision limiting the homestead exemption in states such as Florida and Texas. The bill would put require the homes to be bought 3 years prior to filing for bankruptcy in order to qualify for the exemption.

Another major change is a re-ordering of the priority of claims, which is used to determine would the order in which debts are paid. Creditor cards and medical bills are intended to move up in the food chain.

For more on this read Major Changes Caused by Bankruptcy Reform.

You can file for Chapter Seven discharges every eight years and some people do.

Chapter Seven is meant to give debtors a fresh start. For someone struggling with the emotional and financial pressures of debt it is a godsend.

But debtors should try to learn something from the experience and not become a serial filer, one who goes bankrupt every eight years.

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