How to File a Chapter 7 Bankruptcy – Tricks of the Trade

Debt Relief

To many, bankruptcy is a 10 letter word that is synonymous with financial disaster. When people think of bankruptcy, they imagine themselves and their family standing idly by while all of their important possessions and assets are sold at auction to satisfy the demands of creditors. What a grim scene. Let’s wipe that image from our minds and picture the way a chapter 7 bankruptcy can go when it is filed correctly. Our desolate thoughts of being penniless and homeless are replaced by a more realistic alternative that allows individuals to protect their important assets and then are also able to move forward with life in a more comfortable setting. This is what this blog is going to teach you – how to correctly file a chapter 7 bankruptcy complete with some less than well-known tricks of the trade.

What is Chapter 7?

Chapter 7 is a type of bankruptcy that allows for an individual to discharge all consumer debts. These debts include medical expenses, car loans, home loans, credit card debts, etc. However, there are some debts that cannot be discharged such as owed taxes and student loans. In chapter 7, there is a possibility that major assets such as a home or car could be liquidated and sold in order to satisfy the demands of creditors. However, in many cases liquidation can be avoided simply by submitting a well-planed petition designed by an experienced bankruptcy attorney.

Chapter 7 is an appealing option for those in financial hot water because it allows for a discharge of debts rather than a re-structuring of debt as in a chapter 13 bankruptcy in which a payment plan is created for the debtor to maintain over the next several years.

How to Qualify for Chapter 7 – the Means Test

Qualifying for chapter 7 bankruptcy is the first step towards achieving a full discharge. There are many factors that go into determining this such as what assets an individual has, how much debt the individual has, etc. However, arguably the most important tool in determining an individual’s eligibility for chapter 7 is passing what is called the “Means Test”.

The Means Test is a government designed financial calculating document that determines whether a person is eligible for a chapter 7 bankruptcy or if they should be bumped up into a chapter 13 bankruptcy. It takes numerous factors into consideration. It begins by comparing the median income of an area to the income of the individual, if the individual earns less than the median income then they automatically qualify and pass the means test. However, if an individual makes more than the median income of where they live, then they must complete the extensive full version of the means test.

The remainder of the Means Test (if an individual does not automatically pass) works very similarly to state or federal taxes. The form goes through the various deductions/expenses an individual qualifies for. The form is very comprehensive and only allows for certain amounts in certain sections to prevent abuse. For example, if an individual uses public transportation, they receive a deduction however, the deduction has a cap which cannot be exceeded. By the end of the Means Test, a comprehensive snapshot of an individual’s expenses is achieved. At this point, the amount of funds available after all expenses/deductions is examined. If this number falls beneath a pre-determined threshold (which is given on the form), then they will qualify for chapter 7 bankruptcy. If not, it is more than likely that they will have to pursue other options.

The important thing to remember about the Means Test is that it can be very flexible. Many times an individual may make significantly more than the median amount for their area. However, after a comprehensive evaluation of their expenses, they actually qualify under the means test. Deductions can be adjusted in small ways to have a great impact. For example, making sure to capture all deductions is essential. Missing small items such as “charitable deductions” could mean the difference between falling above or under the pre-determined threshold – every dollar counts when the individual does not automatically qualify. What is important to take away is that the Means Test should be completed with extreme discernment as each deduction can bring an individual closer to passing – especially if the individual earns more than the median for their area.

Filing a Chapter 7 – Tricks of the Trade

We urge anyone who is considering filing a chapter 7 bankruptcy to consult with a bankruptcy attorney – an expert opinion can move your case along without errors.

protect-assets

When filing the petition for your chapter 7 bankruptcy, there are some common techniques that everyone should know about. This techniques is called taking advantage of “allowances”. This term doesn’t mean that an individual is receiving anything from the courts, but rather refers to some common steps they can take to protect their assets. Allowances are predetermined amounts which are set aside to protect certain assets.

Some common examples of allowances are furniture and clothing. It may seem insignificant to protect these things, but you never know when an individual has a respectable wardrobe or some mahogany furniture. Right off the bat an individual can protect $1,000.00 worth of clothing and $3,000.00 worth of furniture, no discussion, they are protected. With these two immediate decisions, a debtor has just increased their amount of protected assets by $4,000.00!

Protecting Your Retirement

It is important to declare all retirement accounts in you chapter 7 bankruptcy petition because they are more than likely all protected.

The Homestead Deed

In bankruptcy law, there is a clause called the “Homestead Deed”. The Homestead Deed allows for a $5,000.00 protection to be placed on an individual’s assets. The Homestead Deed is a priceless weapon in your bankruptcy arsenal. The reason it is so important is because it can protect the most essential assets such as you checking and savings account. If all $5,000.00 is applied towards your bank accounts, then you are guaranteed to be left with at least $5,000.00 in the bank after the bankruptcy is said and done.

But there are instances in which the Homestead deed can do more than just protect once asset. It is important to remember that the $5,000.00 of the Homestead Deed can be applied to multiple areas. For example, let’s say that an individual had $4,000.00 in their checking account but they also owned a used car worth $1,000.00. The Homestead deed could be used to protect both the account and the vehicle because the amount does not exceed $5,000.00! As we can see, the Homestead Deed allows for some creativity when putting together a petition.

Re-Affirming Debt

Many times, individuals wish to discharge their consumer debts but do not want to lose their major assets such as a house or car. A perk of chapter 7 bankruptcy is that it allows debts to “re-affirm” their debt or continue making payments. This can be very useful. For example, let’s say that an individual has $25,000.00 worth of credit card debts but has remained current on their mortgage. If this individual used a chapter 7 petition correctly, they would be able to discharge the unwanted credit card debt but still keep their home as long as they continue to make regular payments. The same would apply for a car that is not “underwater” (in more debt than it is worth).

Conclusion

A chapter 7 bankruptcy is a standardized process, but it is not completely inflexible. If done correctly, the process can yield thousands in savings and protect the most important assets such as bank accounts, cars and even homes. Making sure to take advantage of these common tips and especially planning a reliable strategy can help you make the most out of your case.

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