Financial pressure can sometimes take a toll on daily life. When you can’t get a handle on your finances, starting over may be necessary to reach the road of financial recovery. For some people, filing bankruptcy is an ideal solution. Bankruptcy is a process in which individuals who cannot repay debts to their creditors seek relief from some or all of their debts.
There are various types of bankruptcies that individuals can file. However, the most common types of bankruptcies you might file include chapter 13 and Chapter 7. Chapter 13 Bankruptcy is a repayment plan. It essentially helps individuals to reorganize their debts by making monthly payments on some of their unsecured debts and all of their secured debts. This payment plan is approved by the court. Additionally, it is set up for debtors to pay off their debt between 3 to 5 years.
Chapter 7 Bankruptcy, however, is known as a liquidation bankruptcy or straight bankruptcy. Out of all bankruptcies, Chapter 7 is the most common among individuals who are having serious financial problems. In this process, a court-appointed trustee is responsible for overseeing the liquidation of your assets. Assets are considered anything that you own that has value. These assets are used to pay off your creditors. If you have any other unsecured debts, it will be erased.
What Assets are Liquidated in Chapter 7?
There are a few nonexempt assets that can be taken if you file Chapter 7. Some of these assets include:
- Any property that can be sold by the court
- A second vacation home
- Additional cars or trucks
- Cash, bank accounts, stocks, bonds, and other investments
- Family heirlooms
- Expensive musical instruments (unless the individual is a professional musician)
Who can File for Chapter 7?
In most cases, anyone who owns a property or has permanent residency can file for Chapter 7 Bankruptcy. However, it’s important to note that there are a few requirements you should be aware of in order to file.
One thing to consider is that if you are filing for consumer bankruptcy, your income must pass the “means test”. The means test was designed to limit the use of Chapter 7 Bankruptcy to only those individuals who can’t pay their debts. This is determined by deducting specific monthly expenses from your current monthly income. The only exception is if you are a qualified disabled veteran or your debts are primarily from the operation of a business.
Another requirement is that you could not have filed bankruptcy previously within a certain period of time. Additionally, you must not be an incorporated entity. It’s important to always be aware that if the courts believe you are cheating creditors, you will be denied Chapter 7.
What Assets can Individuals Keep When they File for Chapter 7 Bankruptcy?
When individuals are considering filing for Chapter 7 Bankruptcy, one of their main concerns is whether their assets will be liquidated and if so, how much of their items will be liquidated. The good news is, Chapter 7 does allow for a few exemptions that may put your mind at ease.
When it comes to Chapter 7, an exemption will determine what assets you get to keep. This can include things such as a home, car, pension, personal belongings, and potentially other property. For instance, if your home is exempt, you will get to remain in your home before and after bankruptcy. However, if your home is nonexempt, the trustee has the right to sell it in order to pay off your unsecured debt.
Exactly how many assets can I protect in Bankruptcy?
How many assets you can protect will depend on the state you live in. Each state has its own rules when it comes to exemptions in bankruptcy. Most states require you to use their state exemptions. With that said, there are 17 states that give you the option to use an exemption system created by Congress. This is called the Federal Bankruptcy Exemption. Please note that you cannot choose two exemptions systems. You must choose one or the other.
Most states and federal bankruptcy do allow you to keep a few of your assets such as a certain amount of equity in your home, along with your personal property. Personal property includes items such as a car and many different retirement accounts. Some states may allow you to keep some wages but this is not likely.
As part of completing your bankruptcy paperwork. You will include all of your property and any exemptions that you claim. It’s important to be aware of potential complications that can occur in your bankruptcy process though. For instance, your car may be part of your exemptions. However, if you have unsecured debt (a car payment), the creditor’s lien on this asset will ensure that the creditor gets paid first.
Let’s take a look at a potential scenario. If you have a vehicle that is worth $15,000 and your state allows you to exempt $10,000. Your car loan will still be $5,000. In this case, the trustee is required to pay the lender the balance of $5,000. This would leave you with an equity of $5,000. These kinds of complications are important to take into account when you consider filing for Chapter 7.
Filing for bankruptcy can be a difficult decision. If you would like to learn more about your bankruptcy options or you would like to know more about how we can help you along your financial journey, contact us today. The trusted bankruptcy lawyers at Cibik & Cataldo have been providing superior, cost-efficient, and value-oriented bankruptcy legal services for over 35 years.
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Philadelphia, PA 19102