In a Chapter 7 bankruptcy you get to discharge your debts and start over with a clean slate. However, Chapter 7 has its downside: you will lose your property. Once you file for a Chapter 7 bankruptcy (also referred to as a liquidation bankruptcy), the bankruptcy trustee will collect all of your assets and sell any assets which are not exempt. The trustee then distributes the proceeds to your creditors. As a result you will be free from all of your debts except those that are non-dischargeable. Although you believe that a Chapter 7 bankruptcy can provide an appropriate remedy, you should first check whether you are eligible for Chapter 7. Below is an overview of Chapter 7 bankruptcy rules you need to know before you file a Chapter 7 case.
You must qualify for Chapter 7 bankruptcy under the Georgia bankruptcy means test
Under the 2005 Bankruptcy Act, your income and expenses will be analyzed to determine if you are qualified to file for a Chapter 7 bankruptcy or if you must file under Chapter 13. Instead of selling your assets to pay creditors, under a Chapter 13 bankruptcy you set up a repayment plan to gradually pay your debts with your income.
If your average monthly income for a six month period prior to filing bankruptcy is below the median income of your state for your household size, there is a presumption that you pass the means test and you may choose to file a Chapter 7 bankruptcy. 11 U.S.C. 707(b)(7)(A). However, if your average monthly income is over the median, you will need to complete the means test by calculating your income and expense information. You must subtract all of your expenses from your income to determine your “disposable income.”
- Income includes but not limited to the following: business income, rental income, interested and dividends, pensions and retirements plans, amounts paid by others for your household expenses, and unemployment income.
- Expenses are based on national, Georgia, and local averages and standards and come from the Census Bureau and the Internal Revenue Service. You are allowed to include some of your actual expenses such as payments you are legally required to make and expenses necessary for health and welfare.
If your disposable income is less than $7,700, you pass the means test and you may file a Chapter 7 bankruptcy. If it is higher than $128,000, you fail the means test and you have no option to file for a bankruptcy under Chapter 13 because you are considered to have the ability to pay back at least a portion of your debts. If your disposable income is between $7,700 and $128,000, then you must do further calculations to determine if you have the option to file a Chapter 7 bankruptcy.
The means test does not apply if your debts are not primarily consumer debts. Consumer debt is a debt incurred by an individual for primarily persona, family, or household purposes. 11 U.S.C. 707(b)(1). Taxes and medical bills are generally not consumer debts because you do not voluntarily incur tax or medical debt. Often determining whether a debt is business debt (non-consumer debt) or consumer debt is not easy and depends on the court. You need to check with a bankruptcy attorney in your area. If you are a disabled veteran and incurred your debt primarily during active duty or performing a homeland defense activity, you are also exempt from the means test. 11 U.S.C. 707(b)(2)(D).
Note that if you filed a Chapter 7 case and received a discharge of your debts, you can only file a second Chapter 7 bankruptcy case eight years after you filed the first case.
Your debt must be eligible for bankruptcy discharge under Chapter 7
Even if you file Chapter 7 and you receive a discharge, some debts are not dischargeable under the law. 11 U.S.C. 523. You may still be responsible to pay the following debts after your discharge:
- Income taxes (within 3 years) and all other taxes
- Student loans, unless it would be an undue hardship for you to repay
- Child support, alimony obligations and other debts dedicated to family support.
- Fines and penalties for violating the law, including traffic tickets and criminal restitution
- Certain debts you forgot to list in your bankruptcy documents
You may also be required to pay debts arising from: fraud or theft, fraud or defalcation while acting in breach of fiduciary capacity, intentional injuries that you inflicted, or death or personal injury caused by operating a motor vehicle, vessel or aircraft while intoxicated.
In a case where the creditor challenges, a bankruptcy judge may also declare certain debts non-dischargeable.
You can protect property that is exempt from Chapter 7 liquidation
The property that your are entitled to is called “exempt property.” Exemptions may allow you to keep your home, a car, clothing, and household items or to receive some of the proceeds if the property is sold. Under Georgia law, you can exempt the following categories of properties (with a limited dollar amount) from creditors when you file bankruptcy. O.C.G.A. § 44-13-100.
- Real property used as residence not to exceed $21,500 in value
- Alimony, child support needed for support
- Social security benefit, unemployment compensation, veteran’s benefit, or aid to disabled
- Personal properties including:
- Motor vehicles not to exceed the total of $5,000 in value
- animals, crops, clothing, appliances, books, furnishings, household goods, musical instruments to $300 per item, $5,000 total value
- Jewelry not to exceed $500 in value
When you file bankruptcy in Georgia you may use certain (not all) exemptions provided by federal bankruptcy law in conjunction with your Georgia exemptions.
To exempt property, you must claim it as exempt and list it on your bankruptcy document. Exemptions are not automatic and if you do not list the property, the bankruptcy trustee may sell it and pay all of the proceeds to your creditors.
Secured debts may be discharged in a Chapter 7 bankruptcy or you reaffirm those debts
Secured debts are treated differently in Chapter 7 bankruptcy. Although the secured debt itself may be discharged, the secured creditor may still seize your property securing an underlying debt. If you want to keep certain secured property (such as your car or your furniture), you may “reaffirm” the debt. To do so, you must sign a written reaffirmation agreement and file it with the court before the discharge is entered. In a reaffirmation agreement, you agree that you will remain liable and pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not take back your property as long as you continue to pay the debt.
It is important to keep in mind that if you decide to reaffirm your secured debt to keep your car or your house, you cannot discharge that debt again for eight years because you have to wait eight years before filing another Chapter 7 bankruptcy case. If you cannot keep up your payments during that period according to the reaffirmation agreement, the creditor can and probably will sell your property and bill you for the difference between what you owe and what was received by selling the property.
Chapter 7 bankruptcy may be an appropriate remedy for those individuals who have insurmountable unpaid debts, allowing them to clear their debts and to get a fresh start. However, the Chapter 7 bankruptcy process is somewhat complicated and may be confusing. It is therefore advised for you to consult with a competent bankruptcy attorney before you file for a Chapter 7 case.
Obtaining help filing your case
It is important to not file a case without discussing your specific situation that is familiar with the court your case will be filed with and the nature of your case. If you are facing the filing of a Chapter 7 bankruptcy, call us at 770-609-1247 to speak with an experienced personal and business bankruptcy attorney. Contact >>