Chapter 7 Bankruptcy: An Overview
Chapter 7 bankruptcy is designed to “wipe clean” or discharge your unsecured debts after you have liquidated and paid to your creditors all of your non-exempt assets. Unsecured debt is debt that has no collateral attached to it. Examples of unsecured debt include most credit cards, medical bills, and deficiency judgments resulting from foreclosed property or short sales. Certain unsecured debts cannot be discharged in Chapter 7. This includes debt incurred as a result of fraud. Most people who file a Chaper 7 bankruptcy can keep their home, their car, and their furniture while wiping out credit card debt and medical bills.
Eligibility and Qualifications for Chapter 7
Whether you live in Fort Myers, North Ft. Myers, Naples, Punta Gorda, Cape Coral, Bonita Springs, Estero, or Labelle, you must file for bankruptcy in Fort Myers, Fl. The Fort Myers bankruptcy court services Lee, Collier, Charlotte, Hendry, and Glades Counties.
If your debts are primarily consumer debts, your income for the six moths before filing bankruptcy determines whether or not you are eligible to file. chapter 7 has no limits on the amount of debt that you have. The income limitations are published twice per year by the Department of Justice. Click the website to the Department of Justice here to access the current guidelines. If your income exceeds the published guidelines, our office will calculate a “means test” to see if you can still qualify. The means test looks at various household expenses that you have and compares them to the total amount of debt you have. If you pass the means test, you can still file chapter 7 even if you income exceeds the amounts published in the U.S. trustee’s website. If you don’t pass the means test, you cannot file chapter 7. Instead you must file a chapter 11 or chapter 13 case and pay the amount of your disposable income over 5 years.
If your debts are not primarily consumer debts, the means test does not apply. If you bought investment property in Cape Coral, Lehigh Acres, Golden Gate Estates, or Gateway during the real estate boom, chances are that the property is now under water and you might have hundreds of thousands, if not millions, of dollars in debt. In this case, you might not be subject to the means test because your investment property is not consumer debt. If you purchased one investment property in Naples or Bonita Springs during the boom, you might not be subject to the means test because the amount of debt on the one property might be the main source of your debt.
Classification of debt in bankruptcy
Provided you are eligible to file chapter 7 bankruptcy based on your income, you will then have to classify your debts. In bankruptcy, debts are classified into three categories: secured debt, unsecured debt, and priority debt. Secured debt is debt that has collateral attached to it. Examples of secured debt are your home and your car. Some department store cards are secured by the items you purchased. When you file chapter 7 bankruptcy, you have to tell the court what you want to do with those items. You have the option of keeping the property and paying for it or giving the property back to the creditor and not paying for it. Priority debt is debt that has no collateral; however, even if you file bankruptcy, you still have to pay the debt. Examples of priority debt are IRS debts that are less than three years old and child support. Unsecured debt is debt that has no collateral. Examples of unsecured debt are most credit card debt and medical bills. If you file chapter 7 bankruptcy, you only have to pay your unsecured creditors an amount equal to the nonexempt assets that you have.
What happens to your home if you file chapter 7
A new law went into effect in 2012 concerning debts on your primary homestead for chapter 7 cases. In the past, if you filed chapter 7 bankruptcy and had a first and second mortgage on your home, you had to continue paying both mortgages if you wanted to keep your home. If you filed chapter 13 bankruptcy, you were allowed to keep your home and keep paying the first mortgage, but you didn’t have to pay the second mortgage if the value of the house was less than the amount of the first mortgage. The second mortgages was essentially “stripped” because it was totally unsecured.
The new law allows you to strip second mortgages in both chapter 7 and chapter 13 cases provided the second mortgage is totally unsecured. This law is particularly beneficial in areas such as Cape Coral, Lehigh Acres, and Golden Gate Estates, where home values plummeted after the housing boom in 2005. Many of our clients took out large second mortgages on their property during the boom. In one of our cases, the client was able to retain his home without paying a second mortgage of $500,000.
You must file a reaffirmation agreement for all secured personal property that you want to keep within 60 days of the first scheduled meeting with the trustee (the meeting of creditors or 341 meeting). If you do not sign the agreement, the automatic stay is lifted and the creditor is permitted to repossess the property. Signing the reaffirmation agreement means that you will be personally liable to pay the debt after the bankruptcy is over. It also means that the creditor will report your payments on your credit report, which will help you re-establish your credit.
Bankruptcy also gives you the option to “redeem” secured property, such as furniture, computers, and automobiles. Redemption allows you to purchase property from the creditor at its current market value rather than paying the amount owed. If your items are worn or old, this option is a good option.
Debts that are nondischargeable
Not all unsecured debt is dischargeable in bankruptcy. These
Approximately three to four months after you file Chapter 7 bankruptcy, you will get an order of discharge in the mail. The discharge means that your unsecured creditors can no longer collect money from you.
Example of Chapter 7 case
Husband and wife earn $50,000 combined. They have 3 children. They own a home. The first mortgage is $200,000. The second mortgage is $100,000. The house is worth $150,000. The have an automobile. They owe $10,000 on it. The car is worth $9,000. They bought their sofa at Rooms to Go on their Visa card for $1,500. It is worth $500. They bought their mattress at Rooms to Go but financed the mattress on a Rooms to Go account for $1,000. They owe $500 on the mattress. The mattress is worth $100. They have $10,000 in medical bills. Husband owes $10,000 for back child support for a child from another marriage.
In this case, husband and wife are eligible to file bankruptcy without completing the means test because their combined income is less than the amount allowed for a family of five. Because the house is worth less than the first mortgage, they will keep their home and reaffirm the debt of the first mortgage company. They will pay the second mortgage company nothing. They will keep the car and sign a reaffirmation agreement and pay the regular car payment. They don’t have to pay anything to keep the sofa because it was purchased on a visa card. The mattress is secured because they financed it through Rooms to Go’s credit program. They can choose to redeem the mattress and pay $100 rather than $500. Husband will have to continue to pay the child support because it is a priority debt. They will not have to pay anything on the medical bill because it is an unsecured debt and they have no nonexempt assets.