What is Chapter 7

A chapter 7 bankruptcy is a liquidation proceeding. If you qualify, chapter 7 liquidates your non-exempt assets (most chapter 7 debtors do not have any non-exempt assets) and eliminates all of your dischargeable debts. If you have assets that are not exempt, the bankruptcy trustee is entitled to sell those non-exempt assets and use the proceeds to pay your creditors, pro rata.

The next question, of course, is “what are exempt assets?” First, “assets” means everything that you own, including your house, car, household furniture, clothes, retirement account or pension, artwork, and so on. All of your assets must be listed on your bankruptcy petition. The Bankruptcy Code and most state laws allow someone filing a chapter 7 to exempt certain of those assets, up to a certain value, and keep them after they receive a bankruptcy discharge.

Let’s take your house as an example. Right now, under the Bankruptcy Code, you can protect up to $27,900 in your home’s equity. That means if your house is worth $295,000 and you owe $279,000, you have $16,000 in equity and you can protect your house from being sold (assuming you continue making payments).

Most states have a separate set of exemptions that you can use instead of the Bankruptcy Code exemptions. California, for example, has a homestead exemption that ranges from $300,000 to $600,000, depending on where the home is located. Some states, such as Texas, have an unlimited homestead exemption (subject to certain qualifications).

Exemptions for other assets are set out in the Bankruptcy Code (and/or applicable state law) and are subject to cost of living adjustments each year. Currently, the exemption for an automobile’s equity is $4,450; for household goods, $700 per item or $14,875 total; and for retirement accounts, $1,512,350.

Once all of your assets are listed, your petition will list the exempt amount of each asset, along with any excess amount.

There are requirements for filing a chapter 7 bankruptcy. The means test is probably the most important requirement because if you don’t pass it, you are not eligible to file a chapter 7. You can find the means test forms and calculator on the Bankruptcy Court’s website: https://www.uscourts.gov/forms/means-test-forms/chapter-7-statement-your-current-monthly-income

If you are like most people, you are probably overwhelmed by all of this information. If you are, contact me for a free consultation.

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