Chapter 7 Bankruptcy
Chapter 7 is often referred to as the “fresh start” bankruptcy it eliminates all of your unsecured debts and is over in three to six months. It remains the most commonly filed form of bankruptcy: of the 794,960 cases filed in 2016, 490,365 were for Chapter 7.
Once your filing is approved, you are granted an automatic stay that protects you from all further collection efforts. You no longer owe all those high-interest credit card payments, expensive medical debt, and other obligations that have been keeping you awake at night. If your bank accounts have been frozen or any creditors have been garnishing your wages, then those activities are required to stop.
Overall benefits of Chapter 7
The main reason why Chapter 7 is more popular than Chapter 13 is that it is over quickly and all debts are discharged except for secured debts and certain obligations such as child support, tax arrears, and student loans. Additional benefits include:
- There are no limits on the amount of debt that can be discharged, while you are prevented from filing for Chapter 13 if you owe more than $394,725 in unsecured debt and $1,184,200 in secured debt.
- You are not required to repay your debts in a three to five-year repayment plan.
- In most cases any assets you acquire after filing cannot be seized.
One of the biggest myths about filing for Chapter 7 is that all your property will be seized and sold to repay your creditors. The truth is that there are generous exemptions that allow you to keep most if not all of your assets. In New York, you are allowed to choose between state and federal exemptions.
New York state exemptions include:
- Property valued at up to $82,775, $137,950, or $165,550, depending on where you live. If you don’t own a home, then you may exempt $5,000 in cash.
- All valid IRA, 401(k) and 403(b) accounts.
- Equity in an automobile up to a maximum of $4,425.
- Personal property valued at up to $11,025 in total (includes tools of the trade).
- Up to $8,275 in a personal injury award.
Federal exemptions protect the following:
- Up to $23,675 of equity in your primary residence
- Equity in your car up to $3,775
- Up to $12,625 total value of household goods
- Up to $2,375 for tools of the trade
- Up to $23,675 for personal injury awards (does not include pecuniary loss or pain and suffering)
- Social security and worker’s compensation benefits
- ERISA qualified retirement accounts up to $1,283,025
- Income from alimony and child support
There is a New York state wildcard exemption that lets you apply $1,100 to any personal property if you have not used the homestead exemption. The federal wildcard exemption lets you apply up to $1,250 and any unused part of the federal homestead exemption (up to $11,850) on any personal property.
The means test
If your household income exceeds the state median for its size, then you must pass the means test before you will be allowed to file for Chapter 7. The test is intended to prevent the system from being abused by those who could repay some or all of their debt in a Chapter 13 bankruptcy.
The means test is calculated by subtracting your permitted expenses from your monthly income. These include:
- Income taxes
- Health care costs
- Child care costs
- Insurance premium payments
- Child support or spousal maintenance payments
- Union dues
The result is multiplied by 60, which represents a period of five years. If the total is less than $7,700, then you will be allowed to file for Chapter 7. If it is more, then you may still pass the test if your disposable income is less than $12,850 and it does not exceed one-quarter of the value of your unsecured debts. Should it be more, you will have to seek debt relief by filing for Chapter 13 bankruptcy.
Most people must pass the test before they are permitted to file, but not all. If any of the situations or circumstances below apply to you, then you may be allowed to file for Chapter 7 without being subjected to the means test first.
- Over half of your debts are related to your business
- You are a disabled veteran whose debt obligations were incurred during a period of active duty or homeland defense
- You are part of the National Guard or Armed Forces Reserves and were on active duty for at least 90 out of the 540 days prior to filing for bankruptcy
As you can see, Chapter 7 has allowed millions of people to put their debts behind them so that they can rebuild their financial future, but there are conditions that must be met first. A Bronx bankruptcy attorney can help you review your financial situation and recommend the best debt relief option for you.
Our office represents you in bankruptcy cases from start to finish–from gathering your initial information until you receive your discharge. Using the information and documents you provide, we prepare your petition for you to review and sign. You will have a short court date with a US Trustee after the petition is signed called a Section 341 hearing, or a “meeting of the creditors,” where you will be represented by an attorney. Finally you will receive a discharge. Jayson Lutzky has over 34 years of legal experience and has helped many highly satisfied clients file for bankruptcy protection. If you are seeking a fresh financial start, then call his office at 718-329-9500 to set up a free initial, in-person consultation.
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