Overview of Chapter 7
Learn everything you need to know about Chapter 7.
Guide to Bankruptcy Chapter 7
Filing for bankruptcy is never a decision to be taken lightly, but it can sometimes be the best solution for serious debt problems. McMinn Law Group PLLC understands that filing for Chapter 7 is a significant decision. This option provides a legal pathway for individuals and families to eliminate overwhelming debt and reset their finances.
Understanding Chapter 7 Bankruptcy
Reasons for Filing Chapter 7
Some of the common reasons that push individuals or married couples into debt severe enough to consider Chapter 7 include:
It's also worth noting that disabled veterans whose debts were incurred during active duty and people whose debts stem from business operations may have a "fast pass" to Chapter 7 eligibility.
An Attractive Option
What makes Chapter 7 particularly attractive in certain cases is that it liquidates assets to pay off as much debt as possible, and then discharges (wipes out) all the dischargeable debt—meaning the debtor is no longer personally liable for that remaining portion.
Once a Chapter 7 case is filed, the court appoints a trustee to collect the debtor's non-exempt assets, convert them into cash, and then distribute that money to creditors according to bankruptcy law.
A skilled bankruptcy attorney can help determine if all of your assets can be protected, and, if not, which assets may be at risk, so that you are able to keep the property that is essential to you and still receive a discharge of all dischargeable debt.
Property Exempt from Chapter 7 Bankruptcy
Even when filing Chapter 7, you are allowed to keep certain property that is designated as "exempt" under state or federal law. In Virginia, you must use state exemptions; you are not given a choice between federal or state exemptions.
However, certain non-bankruptcy federal exemptions still apply (such as federal and military retirement accounts and disability benefits).
Common exemptions include:
- Homestead Exemption: Protects equity in a primary residence (real or personal property). The base exemption is $5,000, plus an additional $500 for each dependent.
- An additional $50,000 exemption for real or personal property used as a principal residence is also available.
- Filers aged 65 or older may be able to claim a base exemption of up to $10,000.
- Disabled veterans may be entitled to an additional exemption of up to $10,000.
- "Wildcard" Exemption: Virginia allows a householder to use any unused portion of the original $5,000 homestead exemption toward other personal property.
- Motor Vehicle: Up to $10,000 of equity in a motor vehicle.
- Household Goods/Furnishings: Up to $5,000 in value.
- Wearing Apparel (Clothing): Up to $1,000 in value.
- Tools of the Trade: Tools, books, instruments, and equipment (including motor vehicles used in the trade) necessary for an occupation, up to $10,000 in value.
- Firearms: Up to $3,000 in value.
- Family Heirlooms/Portraits: Up to $5,000 in value.
- Pets: All animals owned as pets, not kept for sale or profit, are exempt.
- Health Aids: Medically prescribed health aids.
- Wedding and Engagement Rings: Exempt without a specific dollar limit.
- Burial Plots/Contracts: A lot in a burial ground and up to $5,000 in a preneed funeral contract.
- Wages: 75% of weekly disposable earnings or 40 times the federal minimum wage, whichever is greater, is exempt.
- Retirement Accounts: Tax-exempt retirement accounts (like 401(k)s, IRAs, and pensions) are generally protected under federal and state law.
- Public Benefits: Social Security, unemployment compensation, and worker's compensation benefits are exempt.
- Personal Injury Awards: Compensation recovered in a personal injury claim is exempt from creditor process.
- Child/Spousal Support: Unpaid or current spousal or child support payments are exempt.
Married couples filing jointly can often double the individual exemption amounts for jointly owned property.
Additionally, if you own your home or other property jointly with your spouse as “Tenants by the Entirety”, that property is fully exempt as to the individual creditors of each spouse.
See Which Debts Are Discharged in Chapter 7
In Chapter 7, you'll see a distinction made between secured debt (debt tied to collateral, like a car loan) and unsecured debt (debt with no collateral, like credit card debt or medical bills).
For instance, if you have a large car loan, you may choose one of these options:
These are common dischargeable debts:
- Credit card debt: This includes outstanding balances, interest, and late fees.
- Medical bills: Unpaid expenses for hospital charges, doctor fees, and other medical services are typically dischargeable.
- Personal loans: Unsecured loans from banks, credit unions, family, or friends.
- Utility bills: Past-due amounts for services such as electricity, gas, water, and phone.
- Past-due rent and lease obligations: Unpaid rent from previous leases can be discharged.
- Collection agency accounts: Debts that have been sold to third-party collection agencies.
- Most civil court judgments: Judgments related to dischargeable debts (e.g., credit card debt) can be discharged, except those related to fraud or willful injury.
- Repossession deficiency balances: The remaining debt owed on a car loan after the vehicle has been repossessed and sold for less than the amount owed.
- Older income tax debts: Certain income taxes that meet specific criteria, such as being more than three years old and filed on time, may be dischargeable.
- Overdraft Fees: Fees owed to a bank in relation to a bank account that has been overdrawn.
- Child support and alimony (domestic support obligations).
- Most recent tax debts (generally income taxes less than three years old).
- Most student loans, unless the debtor can prove "undue hardship"
- Debts for personal injury or death caused by the debtor's operation of a motor vehicle while intoxicated.
- Fines, penalties, and criminal restitution owed to government agencies.
- Debts incurred through fraud or willful and malicious acts
Eligibility for Chapter 7 Bankruptcy
Not everyone qualifies for Chapter 7.
Eligibility factors include:
Ineligibility for Chapter 7 Bankruptcy
You will be ineligible to file for Chapter 7 if you:
In addition, if the court finds that you have:
Then your case may be dismissed, and you could face fraud prosecution.
Take the First Step
It is strongly recommended that you consult with a qualified Chapter 7 bankruptcy attorney who can evaluate your situation, help determine eligibility, guide you through the process, and protect your rights. Connect with us today.