This legal guide presents an overview of filing Chapter 7. Several areas are covered, however I recommend you consult with an attorney in your area for legal advice on your individual case.
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What is Chapter 7
Chapter 7 is a type of bankruptcy case that allows people to eliminate unsecured debt and earn a fresh start in life. Most Chapter 7 cases last about 90 days and relief from lawsuits and debt collectors is available immediately after the case is filed with the bankruptcy court.
At the conclusion of a Chapter 7 case, a discharge is entered by the bankruptcy court. A discharge is a court order signed by a bankruptcy court judge granting debt relief for all “dischargeable debts”. Debts eligible for discharge in Chapter 7 include:
• Credit card debt
• Medical debt
• Auto repossession debt
• Foreclosure debt.
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Eligibility
The bankruptcy law changes in 2005 created a test for people filing Chapter 7 (and Chapter 13) called the means test. The means test contains two components: 1. Median income test and 2. Disposable income test. The median income test involves a comparison between Washington’s median income for your family size against your actual household gross income earned over the six months prior to the bankruptcy filing. For example, if the median income for a family size of one in Washington is $50,000 and you are a single person who has earned less than $25,000 (gross income) over the last six months then you qualify under the median income test for Chapter 7.
The disposable income test involves deducting various expenses from your monthly income. Deductions include income tax withholding, mortgages, auto loans, health care, as well as standard deductions for rent, food, utilities and living expenses.
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Eligibility continued
If the amount left over after the deduction of your "allowed living expenses", multiplied by 60, is less than 25% of what you owe to your "nonpriority, unsecured" creditors or $10,000, you are eligible to file Chapter 7.
For example, let's say you have $150 left over each month, and owe $50,000 to your "nonpriority, unsecured" creditors. Since $150 x 60 = $9,000 and $9,000 is less than 25% of $50,000 (which is $12,500), you would be eligible to file Chapter 7.
In addition to the means test, there are several other considerations to take into account when making the decision to file Chapter 7. A discharge is only available to those who have not received a discharge in Chapter 7 in the last 8 years. In other words, a Chapter 7 bankruptcy case can only be filed once every 8 years.
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Benefits of Chapter 7
1. Discharge of Debt. First and foremost, by filing Chapter 7 and obtaining a discharge, you are able to eliminate a wide array of unsecured debt. This allows you to receive a fresh start and not have to stress over past debt problems. As stated above, the discharge is a court order that restricts creditors from collecting debt eliminated in Chapter 7. Once your Chapter 7 case has been discharged, eliminated debt is gone forever. In fact, if a creditor attempts to collect on a debt eliminated in Chapter 7, the creditor faces steep civil penalties.
2. Automatic Stay. When a Chapter 7 bankruptcy case is filed, an automatic stay goes into effect immediately upon filing. The automatic stay is a federal law (11 U.S.C. 362) enacted by Congress to prohibit most creditors from continuing collection efforts after a bankruptcy has been filed. Such collection efforts include phone calls, letters, lawsuits, judgments, garnishments, foreclosures and repossessions.
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Benefits of Chapter 7 cont'd
3. Retaining your assets. Most Chapter 7 cases are “no-asset” cases. This means that most people do not lose any assets when filing Chapter 7. State and federal laws called exemptions are available to protect all types of property from liquidation in Chapter 7. In the state of Washington, homes are protected from liquidation if there is less than $125,000 in equity. Equity means the difference between the value of the home and the mortgages and other liens on the home. Additionally, there is currently an (approximately) $11,000 exemption to protect all personal property (separate exemption is available for household goods) for a single filer and (approximately) $22,000 for husband and wife if you do not need to use a homestead exemption.
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