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Chapter 7 bankruptcy explained

Chapter 7 is by far the most commonly filed form of bankruptcy in the United States. According to the Administrative Office of the U.S. Courts, there were 596,867 filings in 2015, compared to 306,729 people who filed Chapter 13. Often referred to as the “fresh start” bankruptcy, Chapter 7 discharges nonexempt debt such as:

  • Credit card balances
  • Unpaid medical bills
  • Cell phone and utility bills
  • Payday loans
  • Store debt

If your wages were being garnished and your bank accounts frozen prior to filing, then  these actions stop. So do creditor calls, foreclosures, and even evictions (provided certain conditions are met).

Chapter 7 benefits

The main reason why Chapter 7 is a preferred option for debt relief is that it does not last as long as Chapter 13 (most cases are closed within three to six months) and at the end you are debt-free except for exempt obligations such as student loans, child support, and unpaid taxes.

Other benefits include:

  • No repayment plan: Unlike Chapter 13, you are not required to repay your debts over a three or five-year period
  • No debt limits: A person cannot file Chapter 13 if their secured and unsecured debts exceed a certain amount. With Chapter 7 there are no such limits.
  • Most future property is exempt: In most instances any property you acquire after filing is exempt from seizure. Some exceptions exist, such as inheritances, insurance payouts, or death benefits received within 180 days after filing, but in general you keep more.

Exempt property

To offset creditor losses caused by the filing, any non-exempt property you may have will be liquidated by the United States Trustee and sold. Examples of such property are vacation homes, additional vehicles, and luxury items. You will, however, keep all exempt property, such as your home, public benefits, household goods like furniture and clothes, and retirement accounts. You will also likely be able to retain at least one vehicle.

The Means Test

If your income exceeds the median for New York State, then you will be required to complete a means test to determine if your debts can be partially repaid through a Chapter 13 filing. (Exemptions apply if the majority of your debts are not consumer-based or you are a disabled veteran who incurred the debt while on active duty.) To carry out the test, you subtract allowable expenses from your income to determine if you actually have enough financial resources to repay unsecured creditors in a Chapter 13 plan.

Filing Chapter 7 allows you to start improving your financial situation and rebuilding your credit much sooner. If you are struggling with debt, then a New York Chapter 7 attorney can help you get the fresh start you need for a more solid financial future. Jayson Lutzky is a Bronx bankruptcy lawyer who handles personal bankruptcy cases. He offers free in-office consultations. Visit www.MyNewYorkCityLawyer.com to learn more about Jayson Lutzky and, for an appointment, call 718-329-9500.

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