The most common type of bankruptcy for individuals is known as Chapter 7, or Liquidation Bankruptcy. This bankruptcy structure is designed to liquidate an individual debtor’s assets, and then to use the funds to pay the creditors to whom debts are owed. Once that step is taken, any debts that have not been paid are mostly written off, since the debtor has nothing else that can be used to settle debt. A couple of exceptions to debt that is written off include child support and student loan debt. This type of bankruptcy is sometimes referred to as “straight” or “ordinary” bankruptcy. To liquidate assets means to turn them into cash, or sell. When this is done, the creditors that are owed money receive some of it back, but in many cases, they are also forced to write off a good amount of the debt.
Filing for Chapter 7 bankruptcy is considered a fresh start, a way to wipe one’s credit slate clean. It can serve as a big relief to the debtor, but it also damages their credit very significantly. The Fair Credit Reporting Act states that a Chapter 7 bankruptcy may appear on one’s credit report for 10 years from the date it is filed. This means that future borrowing of all kinds becomes difficult. To secure themselves against the risk of lending to someone that has a record of being less than reliable with their financial debts previously, financial institutions may deny financing, charge higher interest rates and / or require a cosigner. Having these consequences to consider, debtors often try to avoid bankruptcy unless it is truly a last resort, especially if they know they will need to seek car or home financing, or need a credit card in the near future.
If a debtor owns their home, and files for Chapter 7 bankruptcy, they may lose their home. There are two main conditions for losing your home during this process:
If a property is mostly owned by a bank, and a homeowner filing for Chapter 7 does not have much equity, it really cannot be effectively liquidated to pay creditors. If the homeowner is behind in mortgage payments, the bank that owns the mortgage will start short sale or foreclosure proceedings. This is a separate process from the bankruptcy filing.
In some cases, homeowners filing for Chapter 7 can keep their home even if there is equity in it. This can sometimes be achieved with the Homestead Exemption. All states have a system of bankruptcy exemptions that a bankruptcy filer can use to protect their property. In most states,this is based on dollar value of the property, but some states limit the number of acres you can protect from creditors.The amount of the homestead exemption depends on the following factors:
Homestead exemptions can be Federal or State. State homestead exemptions vary greatly from state to state, from just a few thousand dollars in equityto as much as $500,000, or even the entire value of the property. It is important to research state-specific exemptions when considering filing for Chapter 7 bankruptcy. The Federal law also has a list of homestead exemptions. If a debtor can’t claim state residency,he or she can use Federal exemptions. This is not a common scenario, but it does happen.In some states, debtors are allowedto choose between State and the Federal exemptions, but it is them an either / or scenario, as they cannot be combined.
A limit exists in the bankruptcy code regarding the amount of equity one can exempt if there is a move to another state. This exists to prevent debtors from moving to another state just for a more advantageous exemption. Debtors that have owned a home continuously in a state for at least 40 months, can usually exempt the total amount of equity in the property that’s allowed under the exemption. Another key Federal bankruptcy code rule that can affect a homestead exemption is the 730-day rule. To use the state or federal exemptions, in the cases the state allows it, you must live in the state for at least 730 days. If that requirement is not met, one would apply the exemptions of the state wherehe or shelived for the better part of the 180 days immediately before the 730-day period.
Making a decision to file for Chapter 7 bankruptcy should be a thorough and involved process. Taking the below steps can help you decide whether Chapter 7 is the best route for you:
Filing for Chapter 7 bankruptcy is a complex process, and not one that should be entered into lightly. It is imperative to conduct thorough research into the applicable State and Federal laws, and to take a detailed look at one’s credit history, assets, and liabilities.