Chapter 7
 

Chapter 7

    Chapter 7 is the most common bankruptcy chapter for people to file.  A Chapter 7 bankruptcy, is also known as a liquidation bankruptcy.  What this means is all the assets of the debtor are sold to pay off their creditors.    This does not actually mean that you will lose all of your property, however, as some property is protected under your state's exemptions.  Additionally, if the property is secured by a debt (ie a lien or mortgage), there may not be sufficient equity in the property to warrant selling it to pay creditors.  If you have a property with little to no equity, but there is a lien on it, and you want to keep the property, you must continue to pay the debt attached to the property.  Even under the new law it makes more sense for many people to file a chapter 7 than a chapter 13, depending on their circumstances.  Though not as simple as before 2005, this is due to the simplicity of a chapter 7.  As long as you do not risk losing any property that you intend to keep Chapter 7 is the best choice of bankruptcies as you will receive a discharge within 4-6 months of having filed your bankruptcy.

    To determine whether you should file a chapter 7 versus a reorganization, you need to look at the assets you own, versus the exemptions you can claim against the assets as well as how much debt is secured by that asset.  In Michigan, you can elect to use either the Michigan Exemptions or the Federal.  However, a recent court opinion has deemed the Michigan Exemptions to be unconstitutional, and it is generally not the best idea to opt for the Michigan Exemptions.  The Federal exemptions provide for a homestead exemption of $21,625.00 per individual filing as well as a "wildcard" exemption of up to $11,975.00 that can be applied to any personal property asset (like bank accounts).  The Federal Wildcard Exemption shrinks down to $1,130.00 depending on the amount of homestead exemption used.  An example of how to evaluate whether a chapter 7 is a good idea, let's say the house is worth $200,000.  In order for a chapter 7 to be feasible, you would need to have most of the rest of the value of your house secured by a mortgage in order to be able to keep it and file a chapter 7 at the same time.  However, in order to keep the house under a chapter 7, you have to be able to continue to make the monthly mortgage payment, and the creditor may want to have you reaffirm the debt to protect their interests. 

    A Reaffirmation Agreement  would result in that particular debt being treated as if you never filed bankruptcy.  You would not want to enter into a Reaffirmation Agreement in a situation where it is for an unsecured debt, or an undersecured debt such as for a car where you owe more than the car is worth.  You may lose that car in a Chapter 7, if you don't reaffirm, but this is highly dependent on the creditor.  Under the new law, for secured debts for personal property (this does not apply to real property, so far anyway), you are required to either reaffirm, redeem, or surrender the property.  While technically creditors will try and adhere to this law, there is also a requirement that the reaffirmation agreement not cause an undue hardship on the debtor (this requirement does not apply to credit union loans, however).  Even if you sign the reaffirmation agreement, there is no guarantee that the Bankruptcy Court will allow it.  A good legitimate reason needs to be provided if your budget doesn't appear to be sufficient to pay the debt.

    There are other types of exemptions that you must also take into consideration when deciding whether Chapter 7 is the best form of bankruptcy for you.  You can exempt $3,450.00 for your car under Federal Exemptions.  You can exempt up to $11,525.00 with your household household goods exemption .   Your retirement plan is completely exempt (however if you are receiving payments from it, that is not exempt, additionally there are limits to how much can be exempt for an education ira/savings plan).  There are additional exemptions that may apply, however, those are the primary exemptions.  These exemptions do not apply to business liquidations, only to individual and joint (married) bankruptcies (as well as family farmers).    

    Another consideration is your household income.  This is looked at when calculating the Means Test.  The Means test determines whether there is a presumption of abuse if you file a chapter 7.  The first thing that is looked at is your last 6 months of income from ALL sources.  Certain types of income are exempted from this calculation, like Social Security, however it is still necessary to know about it.  If your household income is less than your locality's median (which is updated every so often by the IRS), then there is no presumption of abuse.  If it is above the median then other factors must be looked at to determine if there is a presumption of abuse.  If there is not a presumption, then a chapter 7 may be a good option for you.

    If you are unsure as to whether a Chapter 7 is the best option and you are filing a consumer bankruptcy, you should consider a Chapter 13 bankruptcy.  If you are a family farmer and are unsure about whether a Chapter 7 is best for you, then you may want to consider a Chapter 12 bankruptcy.  If you run a business and would prefer to reorganize your business rather than liquidate it, then you you might want to file a Chapter 11 bankruptcy.