WHAT YOU SHOULD KNOW ABOUT CHAPTER 7
Chapter 7 bankruptcy offers a fresh start and frees you from most debts and financial obligations immediately upon discharge. Filing Chapter 7 will stop garnishments, foreclosure, seizures, repossessions and the burden of creditor collection phone calls. In Chapter 7 bankruptcy, unlike Chapter 13, you will not have to make payments to the trustee over a period of years and you should receive your discharge four to six months after filing. In exchange for the quick and final nature of Chapter 7, upon filing you subject your non-exempt property to liquidation or sale by the trustee to pay off your creditors. However, Florida offers very generous bankruptcy exemptions and, in many cases debtors filing Chapter 7 bankruptcy lose nothing.
The state of Florida will not allow you to be left with absolutely nothing after going through bankruptcy and through the Florida Constitution and §222, Fla. Stat. (2014), provides property exemptions that allow you to remove certain property from the trustee’s liquidation. Below is a list of bankruptcy exemptions allowed in Florida.
Homestead – Your homestead, defined as real or personal property, including mobile or modular home and condominium, not exceeding 1/2 acre in a municipality or 160 acres elsewhere is protected from Chapter 7 bankruptcy liquidation to unlimited value. This exemption protects 100% of the value of your home from the trustee but will not protect it from creditors holding liens such as a mortgage.
Personal Property – Prepaid hurricane savings accounts, prepaid medical savings account deposits, and prepaid college education trust deposits are exempt from liquidation by the trustee. Prescribed health aids, federal income tax credits or refunds, and pre-need funeral contract deposits are also exempt.
Property Credit – There is also a credit for any personal property up to $1,000 of its fair market value which may be doubled if you are filing jointly with your spouse. If you do not claim the Florida homestead exemptions, Florida law allows for a $4,000 compensatory exemption that may be doubled if filing jointly with your spouse. This means that if you and your wife file for bankruptcy and do not claim the homestead exemption you will be able to protect $10,000 of your personal property from the bankruptcy trustee. If you are filing alone and do not claim the homestead exemption you can protect $5,000 of personal property.
One Vehicle – A motor vehicle up to $1,000 ($2,000 if owned jointly by spouses),
Wages – The head of household may claim 100% of earnings up to $500 a week as exempt, which applies to either unpaid or paid wages, or wages deposited in a bank account for up to 6 months. If you are a Federal government employee your pension payments that are needed for support and were received up to 3 months prior to the bankruptcy are exempt.
Pensions – Tax exempt retirement accounts, traditional IRAs and Roth IRAs up to $1,095,000 per person and pensions of state officers and employees, county officers and employees, teacher, firefighters and police officers are also exempt. ERISA – qualified benefits, IRAs and Roth IRAs are likewise beyond the reach of the bankruptcy trustee.
Public Benefits – Public assistance, unemployment compensation, Veterans’ benefits, and social security benefits are also exempt from seizure as are settlements or payments received from workers’ compensation claims. Compensation received by crime victims’ is exempt from liquidation unless you are seeking to discharge a debt for treatment of the crime related injury.
Alimony and Child Support – Alimony and child support needed for support are also exempt from discharge.
Insurance – Death benefits payable to a specific beneficiary, annuity contract proceeds excluding lottery winnings, life insurance cash surrender value, disability or illness benefits and fraternal benefit society benefits are beyond the reach of the trustee. Damages to employees for injuries incurred in hazardous occupations are also beyond the reach of the trustee.
CHAPTER 7 BANKRUPTCY BUYBACKS
If your assets are not exempt from trustee liquidation you will have the option of surrendering any non-exempt assets or paying the trustee the value of the non-exempt property you wish to keep. This is known as a “bankruptcy buyback.” Unfortunately, trustees in Jacksonville will no longer accept buyback payment plans and you must pay in lump sum. There are lenders who can assist you with this process if you do not have the cash.
DEBTS NOT DISCHARGED IN CHAPTER 7
While a Chapter 7 bankruptcy discharge will relieve you of most debts, not all debts are subject to discharge. The following type of debts will not be discharged in Chapter 7:
- Secured debts such as car loan and mortgages must be kept current if you want to keep the property the lender holds as collateral.
- Student loans will not be discharged absent a showing of extreme hardship.
- As a general rule income taxes will not be discharged unless 1) the taxes became due at least three years before the filing of the bankruptcy case; 2) the tax return reflecting the tax due, if required, was filed at least two years before the filing of the case, and b) the IRS sought to collect the tax more than 240 days before the bankruptcy filing.
- Child support, alimony and certain other family obligations ordered by court cannot be discharged.
- Debt for luxury goods or services incurred within 90 days of filing the bankruptcy case will not be discharged absent a showing of good faith (as a general rule it is best to not incur debt within 90 days of filing bankruptcy).
- Debts owed on cash advances obtained within 70 days of filing the bankruptcy will survive the bankruptcy discharge.
- Fines or penalties owed to a governmental unit such as criminal fines and penalties will not be discharged.
- Debts owed as a result of your causing injury or death to another while intoxicated will survive your bankruptcy.
QUALIFYING FOR CHAPTER 7 BANKRUPTCY:
To qualify for Chapter 7 bankruptcy relief and enjoy the benefits offered thereunder you must pass what is known as the “Means Test.” This test determines whether or not you or your family has sufficient disposable income to repay your creditors. If you fail the “Means Test” you cannot file Chapter 7 and must consider a repayment plan under Chapter 13. Answering the following questions will give you an idea if you will qualify for Chapter 7 bankruptcy.
- Have you received a bankruptcy discharge in the last 8 years? If yes, you cannot refile bankruptcy; if no, keep reading.
- Can you pass the Means Test?
To qualify for Chapter 7 bankruptcy relief under the U.S. bankruptcy code you must pass what is known as the “Means Test.” This test determines whether or not you or your family has sufficient disposable income to repay your creditors. If you fail the “Means Test” you cannot file Chapter 7 and must consider a repayment plan under Chapter 13. The first phase of the Means Test is simple and determines if on your income is below the median income level for a family of your size in Florida. If you do not pass Phase I you must move onto Phase II. The calculations necessary in Phase II can be complicated and we recommend that you seek legal counsel to determine if you can file Chapter 7.
Phase I: The Means Test first determines whether or not your income is greater than the medium income for a family of your size in the state in which you live. The medium incomes for Florida as of April 1, 2015 are $42,718.00 for a single earner, $52,421.00 for a family of two, $57,977.00 for three people and $67.539.00 for a family of four. For each family member greater than four you are allowed to add $8,100.00 to your family income. If your income is less than the medium incomes noted above, you are eligible for Chapter 7 bankruptcy relief. If not, you must move to the second phase of the Means Test.
Phase II: If your income is greater than the medium incomes noted above the second phase of the Means Test must be performed. In this phase your allowable expenses (as defined by the IRS) are subtracted from your total income to determine your “disposable income.” If you have disposable income over the next 5 years (60 months) will be less than $6,000 (or $100/month), you “pass” the means test and can file Chapter 7. If you have disposable income over the next 5 years is more than $10,000 (or $166/month) you will “fail” the means test and must demonstrate a special need to file for Chapter 7 relief. Having disposable income between $6,000 and $10,000 over the next 5 years requires one more calculation to determine if you can file chapter 7 bankruptcy.
Having disposable income between $100 and $166 per month requires you to compare your disposable income over the next 5 years to the amount of your unsecured and non-priority debts. If your disposable income is greater than 25% of your unsecured debts you will fail the means test and must demonstrate special circumstances to file for Chapter 7 relief. If your disposable income is less than 25% of your unsecured debts you “pass” and can file Chapter 7 banruptcy. Please remember that failing the means test does not mean you are unable to avail yourself of certain bankruptcy protections. If you fail the means test, you will still likely qualify for Chapter 13 bankruptcy protections.
If you pass the Means Test, please read below.
- Have you completed the required credit counseling course? To file for bankruptcy you must first complete a credit counseling course. The course is offered online and takes about an hour to complete. There is no test to pass and we can help get you set up with this course.
If you have passed all three of these elements you are qualified to file Chapter 7 bankruptcy and are ready to begin the bankruptcy process. For more information on The Bankruptcy Process please follow this link.
Life After Chapter 7 Bankruptcy
After receiving your bankruptcy discharge you will no longer be liable for non-exempt debts. It is also likely that your credit score will improve within 6 months of filing and while you may not qualify for low interest loans, you will be able to obtain credit with higher interest rates. While a bankruptcy can remain on your credit report for up to 10 years, we find that after two years your credit has recovered and the bankruptcy should not significantly affect your ability to buy a home or car.
If you have any questions about bankruptcy or your debt relief options Jacksonville’s debt relief lawyer, Matthew C. Bothwell, Esq. is here to help. Please contact us.