Chapter 7 is known as “straight” bankruptcy or “liquidation” and is the most commonly filed bankruptcy. If all goes well, the Chapter 7 process typically last about 3 months, starting from the time you file until the Court grants you an Order of Discharge. Our goal is to obtain an Order of Discharge for you, which is to have all of your dischargeable debts legally forgiven by the end of the process. This effectively prohibits the creditor to whom you owed money from ever trying to collect from you OR from reporting your debt to a credit bureau. The Chapter 7 discharge most commonly prevents credit card companies, doctors and lawsuit plaintiffs from ever collecting from you.
Generally, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien that you cannot avoid or afford to pay.
If a Chapter 7 consumer does have non-exempt assets, those assets will be turned over to the bankruptcy trustee who will sell them to distribute to creditors.
Chapter 7 Means Test
A consumer Chapter 7 filer will also have to qualify for Chapter 7 bankruptcy through a means test. First, the means test compares your household income to the median income for a family of similar size. Also, the means test is local, meaning it considers comparative income in the area in which you file your bankruptcy. Furthermore, the means test only considers 6 months of household income for comparative purposes, ending in the month prior to the month in which you file your bankruptcy.
The next step depends on whether your household income is lower than or higher than the median income for a family of similar size. If your income is lower than the state median, then you are presumed to be filing in good faith. In this case, the test is over and you qualify to file a Chapter 7. If your income is above the state median, then there is a presumption that you can afford to repay debts. In this case, you must run your income and expenses through a complex formula to determine whether you have sufficient income to repay your debts to creditors.
If this means test formula shows that you do not have sufficient income to repay your debts, then Chapter 7 proceedings may continue. On the other hand, if the means test shows that there is sufficient income to repay the debt, a Chapter 13 bankruptcy may be the better option for you.
Chapter 7 vs. Chapter 13
The majority of personal bankruptcies filed in Florida are Chapter 7 filings. A Chapter 7 bankruptcy typically lasts around 3 or 4 months, which is significantly shorter than a Chapter 13 bankruptcy. A Chapter 13 bankruptcy typically lasts between 3 and 5 years; however, it may offer some advantages over Chapter 7. Some of the benefits to filing a Chapter 13 over a Chapter 7 include the following:
- In Chapter 13, you may be able to eliminate or “strip” a second mortgage lien on your real estate. To do this, the lien must have no equity at the time of filing;
- In Chapter 13, you may be able to reduce or “cram” your secured debts to the value of the collateral. On car loans, the debt must be at least 2 1/2 years old to “cram” it to the car’s value;
- In Chapter 13, you can pay the missed payments on a house, car or other collateral over a three to five year period. THese missed payments are known as “arrears” in bankruptcy;
- In Chapter 13, you can discharge certain debts that aren’t dischargeable in a Chapter 7 bankruptcy. For example, in Chapter 13 you can discharge certain debts related to a divorce or a separation agreement. You can also discharge civil fines and penalties in Chapter 13. None of these debts are dischargeable in a Chapter 7 bankruptcy;
- In Chapter 13, you can continue operating a business while you are in the bankruptcy. In contrast, a Chapter 7 bankruptcy may require that you close your business depending on key facts.
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