Chapter 7 is part of the Federal Bankruptcy Code (or laws) which was created to help consumers who cannot pay their debts. In a bankruptcy case filed under Chapter 7, the consumer files a petition asking the Bankruptcy Court to eliminate (or “discharge”) his or her “dischargeable” debts.
Take a moment to consider what a “discharge” of your debts truly means. It means that from the moment of your discharge, you no longer have any legal responsibility to repay those discharged debts, ever. Your creditors, who own the debts that are discharged, can never again take any steps to legally force you to repay those debts. If you later acquire a lot of money, or even win the lottery, those creditors whose debts were discharged cannot attempt to collect their debts in any way. Note, however, that not all debts are “dischargeable” in a Chapter 7 bankruptcy. See below for a discussion of this.
In exchange for obtaining a “discharge”, the consumer must give up his or her “non-exempt” property. The consumer is allowed to keep his “exempt” property. The trustee in a Chapter 7 case (an attorney who works for the Bankruptcy Court) will take a consumer’s “non-exempt” property and sell it, with the money from these sales being distributed to the consumer’s creditors. In most cases, all of a consumer’s property in a Chapter 7 bankruptcy will be considered exempt, therefore the consumer can keep all such property.
Note that a Chapter 7 bankruptcy is a type of liquidation because the consumer is giving up his or her “non-exempt” property in return for the elimination of the obligation to pay his “dischargeable” debts. This is very different from a Chapter 13 bankruptcy, which is a repayment plan. In a Chapter 13 bankruptcy, the consumer gets to keep all of his assets (whether they are exempt or not), but in exchange must repay his debts over a 3 to 5 year period of time. The most common situation which would cause someone to file for a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy is where that specific consumer has certain “non-exempt” assets that he wishes to keep, which would be lost if that consumer were to file for a Chapter 7 bankruptcy (see “Information about Chapter 13” for more details). Most consumers will find that Chapter 7 better fits their needs.
What property is “exempt”?
Although bankruptcy is governed by Federal law, in New York State, the determination of which of your property is “exempt” is controlled by New York State law. Therefore, the following only applies to New York State residents. Note that “non-exempt” property is any property of the consumer other than that listed below.
Thus, for New York State residents, the following items are considered “exempt” property for Chapter 7 bankruptcies:
● Real property owned and used as a primary residence, including a house, land, a condominium, cooperative apartment or motor home, up to $50,000 of equity. (Equity is the current value of the property less the monies owed on all mortgages and judgment liens against that property.)
● A cemetery plot.
● Cash, totaling up to $2,500, unless an exemption for real property is claimed. This includes U.S. currency, savings accounts, checking accounts, credit union shares, U.S. savings bonds and the right to receive a federal or state income tax refund.
● Clothing and household goods, such as household furniture, a stove, refrigerator, radio, television, cookware, tableware, sewing machine, books, pets worth up to $450, a family bible, pictures and schoolbooks, other books up to $50, a wedding ring, a watch up to $35 and work tools up to $600.
● Security deposits for rent and utilities.
● A motor vehicle, up to $2,400 of equity over any secured amount owed for the vehicle.
● Proceeds of a life insurance policy, if someone other than the debtor in bankruptcy is the beneficiary. Also, proceeds of a life insurance policy, if the person receiving the proceeds is the debtor in bankruptcy and the policy was taken out on the life of the spouse of the person filing for bankruptcy.
● The right to receive certain awards and benefits: social security, unemployment compensation, public assistance, veteran's benefits, disability benefits, crime victim's awards and personal injury awards (up to $7,500 not including pain and suffering and actual monetary loss).
● Property needed for future support, such as alimony and support and wrongful death awards to dependents.
● 90% of wages earned within 60 days of the filing of a petition.
● Pensions, Keogh and 401(k) retirement plans, IRAs and most annuities.
There is a $5,000 limit on the exemptions which may be claimed for the total of cash, household goods, clothing and certain annuities.
If you are filing a joint petition with your spouse, each of you can claim these exemptions. In other words, the amounts of the exemptions are doubled when a married couple files together.
What debt is “dischargeable” in a Chapter 7 bankruptcy?
Most consumer debt is dischargeable in a Chapter 7 bankruptcy, with certain exceptions. Bankruptcy will not normally eliminate the following types of debt:
(1) money owed for child support or alimony, court-ordered fines, and certain taxes;
(2) debts not listed on your bankruptcy petition;
(3) loans you received by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
(4) debts resulting from "willful and malicious" harm;
(5) student loans owed to a school or government body, except if the Court determines that payment would constitute an "undue hardship" for you;
(6) mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor);
(7) personal injury debts caused by driving while intoxicated or under the influence of drugs;
(8) debt incurred after you file for Bankruptcy relief; and
(9) if you have co-signors or co-debtors, your Bankruptcy filing will not eliminate your co-debtor's or co-signor's obligation to repay that debt (however, if your co-signor or co-debtor is your spouse, and you and your spouse jointly file for Bankruptcy relief, that debt will be eliminated for both of you).
Unsecured credit card debt and medical bills, in almost all cases, can be eliminated (“discharged”) in a Chapter 7 bankruptcy
