The bankruptcy code has set rules to allow you to keep certain personal property in order to continue to earn a living after you file bankruptcy. They do this through the use of bankruptcy exemptions. There are Federal and state exemptions which tell the bankruptcy trustee and court that you can keep this property if it is worth up to a certain amount.

Your car or other personal automobile is included in these exemptions. You will be able to keep your car after you file bankruptcy if you car is worth less than, or equal to the exemption amount. So if you have an old car that is only worth $500 and the car exemption is $2500 you can keep the car. If your car is worth $3000 you will have to cover the $500 that is not exempt in order to keep the car.

If you are leasing a car, or making payments on a car you will have to decide what you want to do on the Statement of Intention when you file chapter 7 bankruptcy, letting the trustee know if you want to hand it in or continue paying by signing a reaffirmation agreement. The bankruptcy trustee will have to approve the reaffirmation in order for you to keep your car, and that is typically done by assessing your ability to pay the debt.

If you have a car that is worth a lot of money, or multiple cars, you will want to consult with a bankruptcy attorney in order to see what will likely happen when you file. A good attorney can help you prepare before filing in order to keep as much property as possible.

When you file a chapter 7 bankruptcy, one of the most important things you will do is complete Schedule C which lists your bankruptcy exemptions. Exemptions allow you to keep certain personal property away from your creditors. There are federal exemptions and state exemptions, some states allow you to choose which list of exemptions you want to use.

In those bankruptcy exemptions there is a Pensions exemption which will include any 401k, IRA, Roth IRA, company pension, public retirement benefits such as SSA, and other retirement benefits. For example, you can see in the California Bankruptcy Exemption list the following exemptions:

Pensions

11 U.S.C. § 522 – Tax exempt retirement accounts. Traditional and Roth IRAs up to $1,095,000 per person.

704.110 – Public retirement benefits.

704.115 – Private retirements benefits, including IRA and Keogh.

Government 21255 – Public employees.

Government 31452 – County employees.

Government 31913 – County peace officers.

Government 32210 – County fire fighters.

So, yes you can keep your 401k when you file bankruptcy. If you have loans against your 401k, or are considering taking a loan against your 401k you should discuss your situation with a bankruptcy attorney because the money you receive from a 401k loan could be considered part of the bankruptcy estate and subject to being used to pay your creditors.

The biggest change for chapter 7 bankruptcy filers after the new bankruptcy laws were passed in 2005, is the addition of the bankruptcy means test. The organizations, mostly credit companies, that wanted the bankruptcy laws changed, believed that a large majority of the consumers that file bankruptcy can actually pay their bills and just choose to file bankruptcy to get out of debt for no good reason. The means test is 8 pages of questions regarding your income and expenses that determine if you in fact have enough money to pay your debts. The means test measures whether or not the “presumption of abuse” arises, basically measuring if you are trying to abuse the bankruptcy system or not. So how does the means test work?

Declaration – The first section of the means test is a declaration for veterans or those who are filing bankruptcy on debts that are mostly non-consumer debts.

Income – The next section of the bankruptcy means test is the calculation of monthly income for your household. If you are not married or legally separated and your spouse has their own household, then you will provide your income information. If you are married and filing jointly with your spouse or filing alone, you will have to provide both your income and your spouses information. All figures must reflect average monthly income received from all sources, derived during the six calendar months prior to filing the bankruptcy case, ending on the last day of the month before the filing.

Application of Exclusion – After determining your household income, the means test will compare your income to other families of your size in your state. If your income is equal to or less than the median income, the presumption of abuse does not arise and you can sign the form. If your income is above the median then you will have to continue with the means test.

Marital Adjustment – Any income that was not received on a regular basis may be able to be subtracted in this section to adjust your monthly income for the means test.

Standard Deductions – This section of the means test will deduct expenses from your income for standard living expenses based on averages outlined by the IRS for your household size. Food, clothing, health care, housing, utilities, and transportation and other expenses are spelled out. Additional expenses can be listed that are unique or extraordinary to your family, and deductions for debt payments.

Determination of Presumption – The final section will take into account how much disposable income you have left after your expenses are taken into account. Less than $6000 and the presumption does not arise, if it’s more than $10,000 the presumption does arise and you may be forced into a chapter 13 bankruptcy. If it’s between $6000-10,000 and you can pay at least 25% of your unsecured debt then the presumption arise again, if you cannot pay at least 25% then the presumption does not arise.

The bankruptcy means test can be confusing, and bankruptcy trustees can derive numbers differently so it may be helpful to speak to a local bankruptcy attorney that knows how the means test is being interpreted in your bankruptcy court.

The question we hear the most from people is “do I qualify for chapter 7 bankruptcy?” While the bankruptcy laws are supposed to be accessible to everyone, they can be confusing, and the new bankruptcy laws have changed how courts determine if someone is eligible to file for ch 7 and ch 13 bankruptcy. So, do you qualify for ch 7 bankruptcy?

Individual – You must be an individual to file ch 7. You can be single or married. You can file with your spouse or without them. If you file without your spouse you will still have to disclose their income in order to determine if you are eligible to file chapter 7.

Income – Under the new bankruptcy laws chapter 7 filers must complete a bankruptcy means test which determines if you have the means, enough disposable income, to pay at least a portion of your debts. If your income is below the state median for your family size, as determined by the bankruptcy guidelines then you are eligible for ch 7.

If your income is above the median you may still qualify for ch 7 by providing additional information on your expenses to determine your disposable income. The IRS has provided standard allowances for things like housing, groceries, and other necessary expenses. You may also be able to include extraordinary expenses you may have due to medical and other conditions that will have to be explained to the bankruptcy court.

If your disposable income is less than $6000 you qualify for ch 7, if it’s more than $10,000 you do not qualify for chapter 7 bankruptcy. If it’s between $6000-10,000 and you can pay at least 25% of your unsecured debt then you do not qualify for ch 7, if you cannot pay at least 25% then you can file chapter 7 bankruptcy. The new means test can be complicated if you make more than the median income, so it’s important to consult a bankruptcy attorney.

Filing a ch 7 bankruptcy doesn’t mean you lose all of your belongings and will be left on the streets. While a chapter 7 bankruptcy does liquidate your assets in order to pay your creditors, the Federal government and states have set up exemptions that allow you to keep a certain portion of your assets so you can continue to live a productive life.

Bankruptcy exemptions are basically laws that say you can keep assets that are worth a set amount of money. Any property that is worth more than the exemption amount can be sold by the bankruptcy trustee in order to pay your creditors. There are Federal bankruptcy exemptions and then there are also state exemptions. Each state can determine if you are allowed to use the Federal exemptions, or if you can only use the exemptions set by the state. Whether you can choose Federal or state, they each provide protection for the same types of property, just in different amounts. It’s important to learn what property is exempt when filing for chapter 7 bankruptcy protection so you can determine what property you will be able to keep.

Homestead Exemption – The homestead exemption is set aside for your home or mobile home. The exemption is used to cover the equity you have in your home if you intend to keep it when filing bankruptcy.

Personal Property Exemption – These bankruptcy exemptions cover things like clothing, furniture, burial plots, vehicles, deposits for rent or utilities, pictures, books, etc. Basically any property you own that is not attached to the Earth.

Wages Exemptions – A portion of any wages that you have earned but haven’t been paid yet can be exempt from bankruptcy proceedings.

Pensions Exemptions – Filing bankruptcy doesn’t mean you will lose all of the savings you have set aside for retirement. Federal and state bankruptcy exemptions are available for retirement accounts including traditional and Roth IRA’s, 401k’s, and pensions.

Public Benefits Exemptions – Exemptions are also available for compensation you are entitled to from crime victim’s funds, unemployment, workers comp, POW benefits and disability payments.

Tools of the Trade Exemptions – Tools, equipment and uniforms you own in order to do your job are exempt from bankruptcy proceedings up to a certain amount.

Insurance Exemptions – Exemptions for life insurance, annuities, disability proceeds and other insurance policies are available.

Alimony and Child Support Exemptions – Any alimony and child support whether already paid or still owed to you is eligible for a bankruptcy exemption.

Misc Exemptions – Some states also provide an exemption amount that is available to cover any property that isn’t covered under another exemption, or that is worth more than other exemptions cover.

Knowing the exemptions available to you is important when considering filing ch 7 bankruptcy in order to wipe out your debt. You should get a free bankruptcy review or speak to a bankruptcy attorney to make sure you won’t lose any important property by filing bankruptcy. Your bankruptcy exemptions are listed on Schedule C of the bankruptcy forms and can seriously impact your life, so educate yourself.

A voluntary chapter 7 bankruptcy petition consists of 40-80 pages of forms that start with general information about you and your desire to declare bankruptcy, followed by schedules that detail your debts, assets, expenses, income, leases and codebtors. A ch 7 petition also contains a statement of your financial affairs, SSN, certificates regarding a completed credit counseling course and personal finance course, a means test and a matrix listing the addresses of all your creditors so they can be notified of your bankruptcy filing.

Voluntary Petition – The voluntary bankruptcy petiton form will list your personal information such as name, address, other related bankruptcy cases, how many creditors you have, your attorney’s information if you have one or non-attorney bankruptcy petition preparer.

Credit Counseling – Before you file a chapter 7 bankruptcy you have to complete a credit counseling session. The session must be completed with an approved agency and can usually be completed online. The counseling must be completed within 180 days before filing your bankruptcy petition.

Summary of Schedules – Although this form comes early in a bankruptcy petition, it’s really a summary of all the other forms, totally your debts and assets.

Schedule A – Real property such as any homes you own are listed on this schedule. Any liens that are on the property such as mortgages will also be listed.

Schedule B – Personal property is listed here, usually defined as anything you own that is not attached to the earth, such as clothing, furniture, automobiles, insurance, retirement accounts.

Schedule C – One of the most important schedules in a Ch 7 bankruptcy, Sch C lists your bankruptcy exemptions, the laws that allow you to keep specific amounts of your property from being sold to pay your creditors.

Schedule D – Secured claims are listed on Sch D. Secured means you owe money that is tied to that property, such as a mortgage on your house or loan on your car.

Schedule E – Some debts have priority and have to be repaid even if you file bankruptcy such as taxes, and child support. These debts are listed specifically on Sch E.

Schedule F – Unsecured claims are listed on Sch F and are debts that are not tied to property, such as medical bills and unsecured credit cards.

Schedule G – Contracts and leases are listed here, such as leased cars, cell phone contracts and possible time shares.

Schedule H – If you have a debt that someone else is also responsible for paying, these are called codebtors and are listed on Sch H. Codebtors are notified of your bankruptcy filing as they are considered a creditor.

Schedule I – All income is listed on this schedule, including a spouse’s income even if you are not filing together or only one spouse is filing.

Schedule J – Expenses are listed on Sch J.

Statement of Intention – Another very important schedule for chapter 7 is the statement of intention. This form lists your property that you are still paying on, such as your home and car, and asks you when you intend to do with it. Do you plan on keeping it and continuing to pay, or handing it over to the creditor?

Financial Affairs – This long form asks about amounts you have paid to creditors, lawsuits, insurance losses, property you own that is in the possession of others, previous spouses, old addresses, expenses you have incurred to file bankruptcy and more.

Means Test – The biggest change to filing chapter 7 is the means test. This form takes your income and family size and compares your income and expenses to families in the same area you live to determine if you are trying to file bankruptcy when you really can pay your debts. If you have enough disposable income to pay a percentage of your debts you could be forced into a chapter 13 bankruptcy.

Creditor Matrix – A simple list of your creditors names and addresses are prepared so they can be sent a notice of your bankruptcy filing.

Statement of SSN – Just as it’s named, this form states your social security number.

Financial Certificate – After filing your ch 7 bankruptcy petition you will have to take a course on personal financial management and submit the certificate to your bankruptcy court.

All of these forms and schedules must be completed in order to file a chapter 7 bankruptcy petition. Any individual can represent themselves pro se in a bankruptcy case, but if you don’t understand the bankruptcy laws or have a lot of property hiring a bankruptcy attorney is highly recommended.

There are two options for filing bankruptcy as a consumer, chapter 7 and chapter 13 bankruptcy. Chapter 7 is often referred to as liquidation as all of your unexempted property is sold in order to pay off your creditors. Exempt property is that property that the government allows you to keep in order to continue living a normal life, like a car, clothing, furniture, etc. Each state has their own bankruptcy exemptions, as well as Federal exemptions that can be used in some states.

In order to qualify to file a chapter 7 bankruptcy petition, you must be an individual, you must complete a credit counseling course from an approved agency within the 180 days before filing for bankruptcy relief, and pass the means test which is filed with your petition.

In a ch 7 petition, you will have to file statements that list your creditors, property, income and expenses. You will also have to provide copies of tax returns filed the last two years, pay stubs from the last 6 months, and your certificate from completing the credit counseling course. Bankruptcy filers who are married must provide the spouses information even if they are not filing bankruptcy together so the court can determine the households ability to pay the debts.

When completing your petition, you will have the option to continue paying and keeping your property if you are able to, such as your home or car, by making a reaffirmation agreement with the creditor. By reaffirming the debt you are acknowledging that you intend to make payments. If the trustee approves your reaffirmation agreement, the creditor may have rights to collect payments and reposses the property even after your bankruptcy discharge.

When you file your ch 7 bankruptcy papers you will have to pay a filing fee of $299. This fee can be paid in installments, up to 4 no later than 120 days after filing, and in certain cases can be waived altogether. Once filed, the bankruptcy stay is in effect, and your creditors cannot try to collect on the debts or continue lawsuits, or wage garnishments. Each of your creditors will be notifed that you have filed bankruptcy and given a chance to respond. A meeting of the creditors, a 341 meeting, will be called within 20-40 days of filing the petition. During this meeting, the bankruptcy trustee and your creditors may ask you questions under oath about your debts, assets, income, expenses and your ability to pay. Within 10 days of the meeting the trustee will rule on whether the case should be presumed as abusive under the means test. If your case is presumed to be abusive you will be given a chance to refile under chapter 13.

The bankruptcy trustee is then responsible for liquidating your assets that are not exempt, meaning they are not protected by filing bankruptcy, and giving the proceeds from the sales to your unsecured creditors. Once assets are liquidated, if there are any, then the trustee will grant the debtor a bankruptcy discharge which absolves the debtor, you, from owing what is left to your creditors, basically wiping out your debt. Creditors are no longer allowed to come after you for these debts.

Bankruptcy laws make it very difficult to discharge student loans in a bankruptcy. Knowing your options can go a long way in helping you stay out of default when you find yourself faced with financial difficulties. There are typically three ways to deal with your student loans, deferment, forbearance, and bankruptcy discharge.

Deferment

Deferment is when your loan company will stop your payments for a set period of time without charging interest during that time. Deferments are not automatic, so if you are eligible for deferment you must apply for deferment status. Start by contacting your loan servicing company and let them know why you think you qualify for deferment. Typical scenarios are disability, unemployment, enrollment in school, or membership in an arm of the military service.

Forbearance

If deferment is not an option on your loan, forbearance may be the next best thing. In forbearance your loan company gives you permission to stop making payments for a set period of time, but unlike deferment, interest continues to accrue during your forbearance. While this is less attractive than deferment, forbearances are easier to obtain. Typical reasons forbearances are authorized are poor health, personal problems, or financial hardship. Your loan company will have the forms you need to complete, and may even have them available right online.

Bankruptcy Discharge

Getting student loans discharged in a bankruptcy is extremely difficult. The bankruptcy courts use three things to determine if you are eligible to have your student loans discharged. You typically have had to make good faith efforts to repay the loan before filing (usually a minimum of five years), if you are forced to repay the loan you would not be able to maintain a minimal standard of living and there has to be evidence that your financial hardship will continue for a significant portion of the loan repayment period. You will have to file a separate court action during your bankruptcy that will prove you should obtain a discharge for your student loans.

Filing Chapter 7 bankruptcy is typically done in order to wipe out debts. Debts are able to be wiped out when they are “discharged” which means the debtor is no longer legally required to pay any of the debt. Once a debt has been discharged, no collected action can be taken by the creditor including calls, letters and personal contact.

If a debt is not discharged, the debtor is still responsible for the debt and the creditor can enforce payment. In chapter 7 bankruptcy a debtor can also agree to reaffirm a debt which means they intend to continue making payments in order to keep the property that the debt is attached to, such as a car or home. If a debt has been reaffirmed and the debtor begins missing payments, the creditor can enforce the debt beyond the bankruptcy.

When Does the Discharge Occur?

In a chapter 7 bankruptcy the debts are usually discharged once the time for a creditor to file a complaint has passed which is typically 60 days after the 341 meeting. Total time is about 4 months from the time the bankruptcy petition is filed. In a chapter 13 the discharge will not occur until the debtor has completed the repayment plan which is typically 3-5 years long.

Are All of the Debtor’s Debts Discharged or Only Some?

There are some debts that are not able to be discharged due to public policy reasons, such as child support, or because the debts are a result of the debtor breaking a law such as a debt incurred while drinking and driving.

The most common debts that are not dischargeable are child support, student loans, taxes, debts incurred due to willful and malicious injuries to a person or property and government fines.

Can the Discharge Be Revoked?

Under certain circumstances – YES! If you have committed fraud, acquired property that should be included in the bankruptcy estate or the debtor commits an act of impropriety. Typically the request to revoke a discharge must come from a creditor within one year of the discharge

May the Debtor Pay a Discharged Debt After the Bankruptcy Case Has Been Concluded?

Yes, however, it can no longer be enforced by a creditor.

Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign and file a reaffirmation agreement with the bankruptcy court. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law. Reaffirmation agreements–

* must be voluntary;
* must not place too heavy a burden on you or your family;
* must be in your best interest; and
* can be canceled anytime before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.

If you are an individual and you are not represented by an attorney, the court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.

If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.