Chapter 7 bankruptcy:

• Is meant to eliminate all your debts and allow you to start over.  
• Does not eliminate taxes, child support and student loan debt. 
• Allows you to keep some assets.
• Requires pre-and post-bankruptcy counseling.

To qualify for Chapter 7 bankruptcy, you must satisfy a "means test." If your income is above the means test, you may not get rid of all of your debt.

If you are looking for information about what happens after bankruptcy, click here.

For information about finding an attorney to help, click here. 

For more information about Chapter 7 bankruptcy, see:

• What Is Chapter 7 Bankruptcy? 
• Chapter 7 Income Threshhold  
  
• Assets You Can Keep In Spite Of A Chapter 7 Bankruptcy  
  
• Four Steps To Find Out If You Will Be Required To Make Repayments After Bankruptcy  
  
• Pre-Bankruptcy Counseling  
  
• Post- Bankruptcy Counseling  
  
• Complaints Against Approved Counseling Agencies  
  
• What is A Typical Chapter 7 Bankruptcy Process Like?
  

The underlying concept behind Chapter 7 bankruptcy is to wipe out all your debts and give you a chance to start fresh.

The law was changed in 2005. The changes were meant to educate people with no financial savvy and to keep people from abusing the system. The changes didn't ultimately take into account people like you who may need bankruptcy protection because of the expenses associated with a health condition.

If you are in this situation, you are not alone.

Chapter 7 starts with a credit counseling service. To learn more, see Pre-Bankruptcy Counseling.

Once bankruptcy is started, a Trustee is appointed to gather your property. Chapter 7 is often called "liquidation" because the Trustee then sells all your property for cash - except for "exempt" property and property with little or no equity. All the cash the liquidation bring in is then divided among your creditors to pay debts that exist at the time of filing.

In order to qualify for Chapter 7's elimination of all debt except taxes, child support and student loans, you must meet a means test . The amount varies across the country because the requirement is that your family income must be less than the median income for a family of similar size in your state.

To find the median family income in your state, see the U.S. Census Bureau information which includes a state-by-state listing at http://www.census.gov

If your family income exceeds the state median income for a household of your size, you may be required to repay a portion of what you owe.

The assets that you can keep are called "exempt property."

Exempt property varies according to the state in which you live.

• Most states follow federal law regarding the types of assets you can keep, but differ in the amounts. Under federal law, exempt property includes:
• $18,450 of equity in your home.
• Disability, unemployment, or insurance benefits.
• Retirement plan funds.
• $475 in any particular item or $9,850 total worth of household items including household goods, wearing apparel, appliances, books and musical instruments (usually determined at thrift-shop prices.)
• Tools, equipment, and books worth in total up to $1,850 that are related to your profession.
• An automobile worth up to $2,950.
• Jewelry worth up to $1,225 per person filing.
• Professionally prescribed health aids.
• Whole life insurance that has a cash value of up to $9,850.
• Term life insurance.
• In some states, you can choose to use either the federal or state definition of exempt property.
• In other states, you have to follow state law.

For example, in New York, you can keep home equity of up to $20,000, while in Florida a home is usually exempt regardless of its value. People have been known to move to Florida and purchase a home worth several million dollars to take advantage of the law and protect that much money before declaring bankruptcy.

Normally property which is not exempt and which has a reasonable amount of equity is surrendered to the Trustee in Bankruptcy. If you want to keep some non-exempt property, you can pay the trustee its fair market value or, if the trustee agrees, swap some exempt property of equal value for the nonexempt property.

To learn about the bankruptcy laws in your state, including exemptions, visit www.lawdog.com/state/laws.htm , click on your state, then click on the box that says bankruptcy courts.

To find out whether you will be required to make repayments after bankruptcy, there is a means test (a test of ability to repay) which goes like this:

Step 1. Start with your income

Step 2. Subtract your necessary obligations. For instance:

• If you own a house, deduct the amount of your monthly payment.
• If you rent your residence, deduct the cost of your rent. The amount of utilities and related costs will be determined from a schedule of current local rents for a family the size of your family rather than what you actually pay.
• Car payments
• Alimony
• Child support
• Back taxes
• To learn more, see What Types Of Debt Are Not Dischargeable in Bankruptcy.

Step 3. Deduct an allowance set by the IRS for other expenses -- not your real expenses.

• The amount of utilities and related costs will be determined from a schedule of current local rents for a family the size of your family rather than what you actually pay.
• With respect to your car, the IRS sets the budget for maintenance, fuel and insurance costs based on where you live and the number of vehicles you own.
• An allocation for food, clothes and other personal items is based on national averages.

Step 4. Determine what you can repay over what period of time.

• If you can repay $10,000 over 60 months (5 years), or 25% of your debts -- whichever is less, though not less than $6,000), then you cannot file Chapter 7 bankruptcy. You must file under Chapter 13 Bankruptcy which, as you will see, means you will continue to pay creditors -- even though it will be a lesser amount.
• If the amount you have left is less than these amounts, then your debts can be discharged completely in Chapter 7 -- after you complete a debtor education course. As a rule, pre-bankruptcy credit counseling and pre-discharge debtor education may not be provided at the same time. Credit counseling must take place before you file for bankruptcy; debtor education must take place after you file. To protect against fraud, the certificates are produced through a central automated system and are numbered.
• To learn more, see Post-Bankruptcy Counseling

Chapter 7 bankruptcy can only be discharged once every eight years and remains on the credit report for a period of ten years.

Debts that you incur after filing for bankruptcy are not discharged in bankruptcy. You will still have to pay them.

The pre-bankruptcy counseling requirement:

No more than 180 days before filing for court protection, you must obtain a certificate showing that you received a "briefing" on credit counseling and budgeting from an approved nonprofit agency.

The agency must be approved by the Department of Justice's U.S. Trustee Program to be able to provide the mandatory credit counseling and debtor education. By law, the U.S. Trustee Program does not operate in Alabama and North Carolina; in these states, court officials called Bankruptcy Administrators approve pre-bankruptcy credit counseling organizations and pre-discharge debtor education course providers.

What happens in counseling:

A pre-bankruptcy counseling session with an approved credit counseling organization:

• Should include an evaluation of your personal financial situation, a discussion of alternatives to bankruptcy, and a personal budget plan.
• A typical counseling session should last about 60 to 90 minutes, and can take place in person, on the phone, or online. If you're going to get real value from the session, it is recommended that you do it in person.

Cost -- including when a counseling session is free:

The counseling organization is required to provide the counseling free of charge for those consumers who cannot afford to pay. If you cannot afford to pay a fee for credit counseling, you should request a fee waiver from the counseling organization before the session begins. Otherwise, you may be charged a fee for the counseling, which will generally be about $50, depending on where you live, the types of services you receive, and other factors. The counseling organization is required to discuss any fees with you before starting the counseling session.

Certificate showing you received pre-bankruptcy counseling:

Once you have completed the required counseling, you must get a certificate as proof. Credit counseling organizations may not charge an extra fee for the certificate.

Keep the certificate in a safe, accessible place.

How To Locate A Credit Counseling Agency

Approved counseling agencies are listed on the U.S.Trustee's web site at: www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm or ask at the Bankruptcy Clerk's office in your district.

How To Choose A Credit Counseling Agency

It's up to you to choose which credit counseling agency to use. Read our article on Credit Counseling Services for tips on choosing the best service for you. The right service could lead to a debt management program approved by creditors. If this happens, you will be able to avoid bankruptcy. Such a situation would be better for your credit rating than bankruptcy.

Post-bankruptcy counseling:

A debtor education course by an approved provider should include information on developing a budget, managing money, using credit wisely, and other resources. Providers are on the same list as the agencies approved for pre-bankruptcy counseling and can be found at www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm .

Cost -- including when a counseling session is free:

Like pre-filing counseling, debtor education may be provided in person, on the phone, or online. The debtor education session might last longer than the pre-filing counseling -- about two hours -- and the typical fee is between $50 and $100.

As with pre-filing counseling, if you are unable to pay the session fee, you should seek a fee waiver from the debtor education provider.

Certificate showing you received post-bankruptcy counseling:

When the course is complete, you will receive a certificate. There should be no extra charge unless it was disclosed before.

If you have a complaint against an approved credit counseling service, contact the U.S. Trustee Program by email at USTCCDEComplaintHelp@usdoj.gov, or in writing at Executive Office for U.S. Trustees, Credit Counseling and Debtor Education Unit, 20 Massachusetts Avenue, N.W., Suite 8000, Washington, D.C., 20530.

Include the name of the credit counseling organization or debtor education course provider, the date of contact, the person with whom you spoke and as much detail about the incident as you can.

The following timeline illustrates a typical Chapter 7 bankruptcy proceeding after you go through the credit counseling requirement. Keep in mind that the timeline is very general and may not apply to your particular court.

CHART TK