A Guide to Chapter 7 Bankruptcies
The most common type of bankruptcy is a Chapter 7 bankruptcy. This is also called a liquidation. The process usually takes approximately three to four months for a standard case. During this process you file a petition that provides information regarding your income, expenses, debts, assets, and personal information. The bankruptcy process allows you to keep certain items. If you have more then the minimal items the bankruptcy trustee sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay creditors.
Who Can File
Chapter 7 is an option for individuals or businesses. An individual is basically being given a fresh start after filing a Chapter 7. A business that files a Chapter 7 as way to close your business after it is no longer profitable. Basically, after a Chapter 7, the business ceases to exist.
Parties in a Bankruptcy
There are many important people to know about in your bankruptcy filing. These people include:
Debtor
The debtor is the person (or persons or businesses) filing for bankruptcy. These individuals are looking for relief under the bankruptcy code.
Case Trustee
This person is chosen by the court to represent your creditors. It is his/her job to review your petition, ensure it is accurate, and also determine if you have any assets that the court can take and sell to pay your creditors. The Trustee interviews you at your Meeting of Creditors (also called a 341). The Trustee has a lot of power; he or she can sell jointly owned property, cancel contracts, and much more.
Creditors
These are people that the Debtor owes money. They have the right to review your petition and assets. They also have a right to object to your discharge if they believe it is being done in bad faith or you have certain debts that should be considered non-dischargable.
U.S. Trustee
This person represents the Justice Department. The U.S. Trustee has a responsibility to ensure people are properly filing bankruptcy and that cases are appropriate. Most Debtors never deal with the U.S. Trustee, but they do audit random cases to ensure your paperwork is in order, you have all the proper documentation, and you have followed all the rules.
How to Qualify
When a debtor files Chapter 7, the court looks at the household income. If the household income is below the median for your state, you can qualify for Chapter 7.
If your household income is above the median income for your state, you may still qualify. The court requires that your income is analyzed under what is called the Means Test. This test is basically used by the court to determine if you have any disposable income at the end of every month to pay over to your creditors. The court determines the disposable income by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy). Some of these expenses are actual expenses, such as car payments, mortgage payments, taxes, etc. Other expenses are based on the Internal Revenue Service standards for your county, such as utilities, food, etc. Using these standards, if you have little or no money leftover, then you can usually qualify for a Chapter 7.
Exemptions
The exemptions you can use depend on state law and where you have resided for the past two years. There are also federal exemptions some Debtors are permitted to use. These exemptions, which are really legal protections, allow you to keep certain assets during your Chapter 7. Assets without protections are called non-exempt assets. The trustee in your case looks at these assets to determine if there is value to sell and give to creditors. In Virginia, there are various exemptions that apply for residents. Some of the most common exemptions include:
Clothing
Virginia law allows you to protect up to $1,000 of the value of clothing. Used clothing have a very low resale value; we use thrift store prices to value clothes. The only issues that usually ever arise are if there are a significant amount of newer designer clothes.
Vehicles
Virginia’s automobile exemption allows each individual Debtor up to $6,000.00 in equity in a car. If a car is jointly owned, this means a couple can have up to $12,000.00 worth of equity in the car. This means that if you have a car worth $20,000.00, but there is a $18,000.00 loan on the vehicle, there is only $2,000.00 worth of equity.
Household Good and Furnishings
Each debtor is allowed up to $5,000.00 on household goods. Generally, there is no issue with these items unless you have valuable antiques or collectibles.
Wedding and Engagement Rings
Virginia exemptions permit for an unlimited exemption for wedding and engagement rings. This means there is no limit on the value you can have for an engagement and/or wedding ring.
Tenants by the Entirety
There is an unlimited exemption for property titled Tenants by the Entirety (TBE) when there is no joint debt between the spouses. In Virginia, the law allows property (usually a marital home) to be titled in a specific manner between a married couple, but also requires that no joint debts exist between the parties. Additionally, there are requirements related to the TBE exemption regarding the type of property and how is was obtained. If you think this may apply to you, then I recommend speaking to an experienced bankruptcy attorney. In addition to the above issues, the spouses can have no joint debt; the non-existence of joint debt must also be proven to the trustee in your case.
Federally-Qualified Retirement Plans
Virginia law allows for a generous exemptions for traditional retirement plans, such as your 401(k), IRA, Thrift Savings Plan (TSP), etc. These qualified plans are all 100% exemption. The only caveat
Tools of the Trade
There is a $5,000.00 exemption for assets that are directly related to your primary profession. As a result, it is very important to review your situation with your attorney. For example, if you are a plumber, but have a side job as an Uber driver that brings you in extra money, you would likely be able to use the Tools of the Trade to protect tools necessary for your job as a plumber, but not be able to protect any assets related to driving Uber, such as your car or car cleaning equipment.
Wildcard
Virginia’s wildcard exemption is different than many other states. A wildcard applies to any asset that has no other exemptions available, including cash in the bank and equity in a house. You can use this exemption to supplement any of the above exemptions, if the applicable exemption is not sufficient to protect your property.
Virginia’s wildcard is also called a Homestead Deed; it has this name because a document must be filed in the land records in the county in which you reside. This exemption is a $5,000.00 lifetime exemption. The exemption increases an additional $500.00 for any dependents.The exemption increases to $10,000.00 at the age of 65. However, since this is a lifetime exemption, if you file bankruptcy and use $1,500.00, you only have $3,500.00 remaining for any future bankruptcies filed in Virginia (until you turn 65).
NOTE: The above list of Virginia bankruptcy exemptions is NOT complete or exhaustive list. It includes only the most common exemptions. Additionally, these exemptions may change depending on federal and state law. See an experienced bankruptcy attorney for the most accurate information about exemptions and what exemptions may apply to you.
Warnings about assets, exemptions and transfers
It is also important to note that transferring assets to avoid including them in your bankruptcy is a bad plan. All transfers of property within two years of filing bankruptcy must be disclosed. The trustee can petition the bankruptcy court to reverse those transactions. If the court determines you did the transfer with the intend to avoid a bankruptcy or to hide assets from creditors, the court may also deny you a discharge of your debts.
The trustee, and potentially the court, review any debts that have been paid back within the last year. If you have paid back family, friends, or business partners, the court can actually sue those individuals for return of the funds. The law provides that you must be treat all creditors the same; as a result, you must treat American Express the same as Uncle Joe. The courts refer to the better treatment as a “preference” because you are giving preferred treatment to one creditor over another.
Once a Chapter 7 bankruptcy is filed, you cannot voluntarily choose to dismiss the case. A judge must grant you permission to dismiss a Chapter 7 case; judges only allow for a dismissal for good cause. An experienced Virginia bankruptcy attorney will be able to review your situation and help prevent potential problems in your case. Having an lawyer handle your case properly from the start can prevent problems later on.
Alternative Options to Chapter 7
If Chapter 7 is not right for your situation, there can be other options. It really depends on why Chapter 7 does not work for you. If you have nonexempt assets, a Chapter 13 is another option to consider. Additionally, sometimes debt negotiation is a better option. If you have limited amounts of debt or cannot qualify for a Chapter 7, sometimes having an attorney help you settle a debt, is a better option. Some of my clients who are trying to stop a foreclosure, are better suited to apply for a modification before considering bankruptcy.
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If you are considering bankruptcy, make sure to speak to an experienced bankruptcy attorney. Ashley F. Morgan Law, PC helps many individuals file bankruptcy every month. Attorney Ashley Morgan has experience dealing with all the above issues. She understands bankruptcy is a difficult discussion for many, and she wants her clients to completely understand the bankruptcy process before making any decisions.