Chapter 7 Bankruptcy: A Fresh Start


Called the “Fresh Start,” a Chapter 7 Bankruptcy eliminates most unsecured debt without the need to repay any of your creditors.

Qualifying for Chapter 7

Chapter 7 is not for everyone, and not everyone qualifies for Chapter 7. The first step in determining whether you qualify for Chapter 7 is the “means test”. The means test looks at the median income by family size to determine if the person(s) filing qualify for a Chapter 7 Bankruptcy. The “means test” is regional, so persons in Michigan have a different relevant income level than persons in California or Mississippi. The numbers change every six months. Over the past five years, the single filer income in Michigan has fluctuated between $41,000 and $45,000, and $70,000 to $74,000 for households of four. The current numbers are available here. The means test income number is based on “Gross Wages”. If your gross income is less than the current means number for a household of your size, chances are you will qualify for a Chapter 7 Bankruptcy. If your gross income exceeds the amount on the means test, you may still qualify for a Chapter 7 Bankruptcy.

Factors that can influence your eligibility include but are not limited to: Car Payments, Alimony or Child Support Payment, Health Insurance, Taxes, Child Care, or verifiable above-average household expenses, such as motor vehicle expenses related to long commutes for work. If you qualify for a Chapter 7 Bankruptcy it may not be the best option for you if there is debt that can be discharged in a Chapter 13 Bankruptcy but not in a Chapter 7, such as:

  • A second mortgage that is unsecured
  • Property Settlement obligation through a Divorce Proceeding
  • Condominium Fees

It may also be beneficial to file a Chapter 13 Bankruptcy if you are facing substantial non-dischargeable Tax Debt, have filed Chapter 7 within the last 8 years, are being garnished for non-dischargeable Student Loan Debt, or have assets which cannot be protected in a Chapter 7 Bankruptcy.

 

Protecting Your Assets in a Chapter 7

One of the reasons it is a good idea to hire an experienced Bankruptcy Attorney is to protect your assets from being sold to pay your creditors.

Without going into too great of detail, the Trustee appointed to oversee your Chapter 7 Bankruptcy is effectively the representative of the Creditors. His or her job is to find assets that can be used to pay the creditors. As an added incentive, the Trustees are paid 25% of the first $5,000 in assets, 10% of amounts between $10,000 and $50,000, and 5% of any amount between $50,000 and $1 million. Accordingly, you can imagine that some Trustees will go to great lengths to “find” assets for the creditors. In Michigan, a debtor can use Michigan Exemptions or Federal Exemptions when filing for Bankruptcy. Most often, the Federal Exemptions are used.

The most commonly used exemptions allow for $22,975 of equity in your homestead (house), $12,250 in personal items, $1,550 in jewelry, a wild card of $1,125 that can be used for anything (along with 50% of any unused homestead exemption), $3,625 of equity in a car, and up to $1 million in any qualified retirement plan. These exemptions are doubled for married couples. If property is not properly exempted, it will belong to the Trustee. If you have too much equity in your home, or have property that cannot be exempted, you may want to file a Chapter 13 Bankruptcy where you can keep all of your property, provided you pay any excess equity to the creditors.

Fees

We charge an all-inclusive $1,399 for all Chapter 7 Bankruptcies. This includes the required credit counseling and debtor education courses, a multi-party credit report and the $306 filing fee. In addition, while I do not sign Reaffirmation agreements, my office will complete those forwarded by Creditors if you choose to reaffirm a debt, at no additional charge. We will also respond to pending lawsuits and recover garnished funds, where possible, at no additional charge. We will accompany you at your 341 meeting and make sure you have all the information you need to complete the hearing well in advance of the meeting. Every case is different, so it is impossible to mention every service we provide to our clients, if needed. Suffice it to say, we provide you with full service at an affordable set fee. We also accept time payments, and require only a $200 retainer to start our representation.

Chapter 7 Vs. Chapter 13

Chapter 7 isn’t always the best option, even if you qualify. In many cases, Chapter 13 Bankruptcies will discharge debts that Chapter 7 will not. Some of these may include:

  • A second mortgage that is unsecured
  • Property settlement obligations through a divorce proceeding
  • If you are facing substantial non-dischargeable tax debt
  • If you have too much equity in your home
  • If you have property that cannot be exempted

Click here for more information about Chapter 13.