Chapter 7 Bankruptcy
This is the most common type of bankruptcy, and is often suitable if the main problem is credit card or medical debts. In Florida individuals are usually limited to keeping $1,000 of personal property as well as $1,000 in equity in a motor vehicle. Under a statute taking effect 1 July 2007, if the individual filing does not claim a homestead exemption, the $1,000 exemption for personal property is increased to $5,000.
This bankruptcy will usually not eliminate debts to the IRS (though it might if the taxes are more than three years old), and will usually not reinstate mortgages that are not current when the case is filed. If you have a new model car that is paid off or has substantial equity, the Chapter 7 may not work for you.
It usually eliminates credit card debts (though you should not have any recent charges when you file the case) and medical bills.
BAPCPA Changes: Under the new law we will need to compare your income to the median income of your family size for Florida, and if you are over the median income to a more complicated financial analysis to determine whether you can file Chapter 7 or will be forced to file Chapter 13. Income will usually be presumed to be the average of your monthly income for the last 6 months, even if you are making less when you file the bankruptcy case.
The debtor cannot get a discharge in a Chapter 7 if they received a discharge in a prior Chapter 7 or Chapter 11 case within the prior 8 years; or if they received a discharge in a prior Chapter 12 or Chapter 13 case in the prior 6 years (unless in the Chapter 12 or Chapter 13 the plan repaid all creditors in full or paid 70% of the claims and the plan met good faith and best effort standards).
Documents required to be obtained by the debtor and filed with the Court in Chapter 7:
- Copies of payroll stubs or other evidence of monies paid by an employer in the last 60 days.
- Records of any interest of the debtor in an educational IRA or state tuition program.
- A certificate from their consultation with an approved credit counseling agency, and a copy of any repayment plan prepared by such agency.
- A certificate from their consultation with a personal financial management course (within 45 days after the initial meeting in the bankruptcy case)..
Additionally, the debtor must provide the trustee with the following documents:
7 days prior to the meeting at the courthouse:
- A copy of the most recent tax return that was filed by the debtor.
At the meeting of creditors:
- A picture identification issued by a governmental unit
- Proof of social security number (must be prepared by 3rd party: social security card, W-2 or 1099 statement, etc. The tax return itself will not qualify).
- A copy of the most recent paystub or document showing most recent amount paid by their employer.
- Statements for each bank account, investment account, money market, mutual fund or brokerage account for the time period including the date the bankruptcy was filed.
- Proof of the monthly expenses shown on the budget (to the extent such expenses can be proven: ie mortgage and car bill statements; utility bills, homeowner or condo fee statements, prescriptions and copies of bills for medicines and doctor visits, etc).
Additional Information on Chapter 7 Bankruptcy
Chapter 7 bankruptcy is usually the quickest and simplest bankruptcy, though it has gotten much more complicated since passage of the 2005 bankruptcy amendments.
Under Chapter 7 you are limited in how much stuff (land, cars, bank accounts, household goods, etc.) you can keep, and limited in what you can do with secured debts (debts on which the creditor could repossess items if the payments are not made). It is generally best for clients who mainly have problems with credit cards, medical bills, repossessions, or other debts which are not related to property they wish to keep, and who do not have a lot of property, and with limited income.
The law which determines what you are allowed to keep in Chapter 7 is based on where you were living for the last 730 days, or if you moved during that time, where you lived for most of the 6 months prior to 730 days before you file bankruptcy.
If Florida law applies, you are usually allowed to keep your home if you keep making all mortgage payments, $1,000 equity in a car, $1000 in other property (including bank accounts), and retirement plans. If you do not have a home, (and under some circumstances if you do but do not have any equity in it), then you may be entitled to another $4,000 of property.
If a husband and wife file jointly, each are allowed these values of property to keep. If you are over these limits, you may still be able to file but may need to pay money to the trustee to buy back the extra value.
The second primary limit on Chapter 7 is if you make too much money, you cannot file Chapter 7 bankruptcy. There are two budgets which the Court examines in determining whether you make too much money. One is based on your actual income and expenses when you file the case. If you can afford to repay creditors, you may be required to file Chapter 13 where you repay a portion of the debts over time. The other test is the ‘means test’ added in the 2005 law.
The first part of the means test is to compare the family income over the last 6 months (including the income of any family member whether or not they are filing bankruptcy, to the extent they pay any of the family expenses) to the median income for a family that size in the state. These tables are found here.
If your average income is higher than the median income from the table, then the expense portion of the means test must be completed. This is one of the most complicated parts of the bankruptcy filing, and should be done by qualified and experienced counsel. There are many open issues and complications in determining the allowable expenses for this portion of the budget. However, just because you are above median income does not mean you have to file Chapter 13. Depending on the expenses, you may still be able to file Chapter 7.
The third consideration in filing Chapter 7 is what type of debt you have. If you owe income taxes you often (though not always) need to file Chapter 13 to get rid of these debts, and may or may not have to pay these taxes in full through the Chapter 13. Many clients recently have been able to get rid of 2nd mortgages on their homes in bankruptcy, and still keep their homes. This can only be done in Chapter 13. Also, Chapter 13 can often reduce the debt on a car to the current value of the car, and/or reduce the interest rate on a car to as low as 5%.
The large number of considerations in determining what type of bankruptcy to file makes it very difficult to make this decision without advise of experienced bankruptcy counsel. We have a free consultation, where I usually spend an hour or more to review your situation and decide what is the best option in the long run to get you the most relief from your debts while maintaining a reasonable living standard.