Chapter 7

At A Better Way Bankruptcy we understand that declaring bankruptcy can be stressful and intimidating.  However, once you understand the process and have experienced attorneys assisting you, many of those worries and fears disappear.  For years, our lawyers have helped numerous clients restructure their debts and financial obligations, and reestablish their lives by filing for bankruptcy. 

Chapter 7

For individuals who have very severe debts, filing for Chapter 7 bankruptcy might be appropriate.  Chapter 7 is a type of bankruptcy filing, where debtors sell their nonexempt assets and use the proceeds from the sale to repay debts.  Subject to certain exceptions, in most circumstances, debts that are not covered by the proceeds of the sale are discharged.  Some debts, however, may not be discharged, such as student loans, child support, and spousal maintenance.  

Before, under previous bankruptcy laws, individuals could choose the type of bankruptcy that suited their needs, and often most people would choose Chapter 7 over Chapter 13.  However, new bankruptcy rules may now prevent some people with higher incomes from filing for Chapter 7 bankruptcy. 

Restricted Eligibility for Chapter 7

Not every person who wants to declare bankruptcy is eligible to file for Chapter 7 under the U.S. Bankruptcy Code.  According to the new rules issued by the federal government, you have to first determine your "current monthly income."  You should keep in mind though that the "current monthly income" is not your stated income at the time of filing, but rather, it is your average income over the previous six months prior to filing.  Therefore, for individuals who just lost their jobs, their "current monthly income" figures will be higher than the actual amount they take in every month by the time they file for bankruptcy.  

After obtaining your "current monthly income" figure, you then compare this amount against the median income for a family of your size in the state you reside.  If your monthly income is less than or equal to the median, then you are eligible to file for Chapter 7.  However, if your monthly income is higher than the median income, then you must pass "the means test" to file for Chapter 7 bankruptcy. 

The Means Test

The Means Test is generally a method of determining whether the individual has enough disposable income to make payments under a Chapter 13 plan, which is another type of bankruptcy filing. 

For the Means Test, you have to first determine your current monthly income--the average income for the last six months prior to filing for bankruptcy.  After you obtain this figure, you subtract the IRS Allowable Living Expenses from the current monthly income amount.  You also subtract your secured and priority debts from your current monthly income. 

Using the figure obtained from the Means Test, you then determine whether you are able to pay a minimum of $6,000 over the next five years or at least $100 per month.  If you are able to pay this amount, you will probably be able to file for Chapter 7 bankruptcy.  However, if you are able to pay at minimum $10,000 over the next five years or about $166.67 per month or more, you are probably ineligible to file for Chapter 7. 

If you could pay more than $6,000 but less than $10,000 over the next five years, then we use a mathematical calculation to determine whether your Chapter 7 filing will be successful or unsuccessful.  If you could pay 25 percent or more of your unsecured debt, then your Chapter 7 filing will probably be denied, but if you cannot pay 25 percent of your unsecured debt, there is good chance that your Chapter 7 filing will be successful. 

Financial Management Course

Another requirement for filing either a Chapter 7 or Chapter 13 bankruptcy is obtaining a certificate of credit counseling from an agency approved by the U.S. Trustee's office.  This certificate is issued after you receive credit counseling from the credit counseling agency.  You can receive the credit counseling through the Internet and it will generally cost about $50.00.

Property Must Be Valued at Replacement Cost

Under previous bankruptcy rules, individuals filing for Chapter 7 bankruptcy could value their personal property, such as furniture, appliances, cars, jewelry, and other property, based on what they could sell the property for in a garage sale.  As a result, the property would be valued at low amounts and, in most circumstances, fall within the "exempt property" categories that most states offer.

However, new bankruptcy laws require that property be valued at replacement cost, which means that the age and condition of the property must be considered in the property's valuation.  This will increase the likelihood that the value of the property will be higher, and more debtors might have their property taken from them and sold by the trustee. 

State Exemptions Are Not Available to Recent State Residents

Previous bankruptcy rules stated that so long as a person lived in a particular state for at least six months, the laws of that state could govern the types of personal property debtors were allowed to keep under Chapter 7 bankruptcy.  However, under the new law, individuals are required to live in a state for at least two years before filing for bankruptcy in order to use that state's exemption laws.  Otherwise, individuals must follow the exemption rules of the state where they used to live. 

With respect to homestead exemptions, which specify the amount of equity in a home a person can withhold from creditors when filing for Chapter 7 bankruptcy, a person must live in the state for at least 40 months to use that particular state's homestead exemption rules.

For a team of experienced and dedicated bankruptcy attorneys in Michigan, contact A Better Way Bankruptcy for a free initial consultation today.