The start of each year often marks the pinnacle of financial stress for many American households. This is caused by the ending of the holiday season, which is characterized by increased travel and gift-giving expenses, and the looming start of tax season. This year, however, might be worse for many households than in past years due to the deteriorating state of the American economy. As of 2023, it is estimated that American households are responsible for over $17.23 trillion of debt with most of it being held in mortgages, credit card debt, and car loans. This is the highest amount of cumulative household debt ever recorded. This coupled with the effects of increased inflation can spell disaster for many Americans in 2024.
If you find yourself in a situation where you feel as though you are drowning in debt with no possibility of ever paying it off, a Chapter 7 bankruptcy may be your best option. Chapter 7 bankruptcies work by selling non-exempt possessions and assets to repay your creditors the maximum amount possible. Since your all your non-exempt assets will be sold, there is no repayment plan that will be put in place. This means when the Chapter 7 Bankruptcy is finalized, you get a fresh start and a new chance to rebuild your credit. Nonetheless, it should be heavily emphasized that this option is a last resort and that all other possible options should be considered.
Who Qualifies?
Not everyone can file for a Chapter 7 bankruptcy. There are a few qualifications an individual must meet before their bankruptcy can be approved by the Court. First, all applicants must complete a state-approved credit counseling course within 180 days before filing for bankruptcy. This is done to try to correct behaviors that may have led an individual to file for bankruptcy so that the same situation does not happen again. Second, all those filing for a Chapter 7 bankruptcy must pass a means test. This test will determine if an individual is able to make partial payments to creditors based on the level of their disposable income. Since a Chapter 7 bankruptcy exempts the individual filing from repaying their debt, it makes sense that someone who can partially repay creditors to be disqualified. The third requirement is that an individual cannot file for a Chapter 7 bankruptcy if they have already filed for one less than eight years ago or if they had filed a Chapter 13 bankruptcy within the last six years. Additionally, if an individual was denied either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, they must wait a minimum of 181 days before filing again. Lastly, if it was determined during the filing process that an individual knowingly defrauded creditors, the Court will dismiss the case. The most common instance of fraud in these matters occurs when the individual filing for bankruptcy purposefully obtained loans and credit card debt with the intention of declaring bankruptcy to avoid repayment.
What Debts Go Away?
The main focus of Chapter 7 bankruptcy is to discharge unsecured debts, including: medical debt, unsecured personal loans, credit card debt, and payday loans. It may also discharge some of the debt you have from secured loans, like an auto loan or mortgage, but it will not remove any creditor’s lien on these secured loans. This potentially means that after the Chapter 7 bankruptcy process the creditor might require the individual filing to make payments on the loans or, if the individual cannot pay, they may foreclose on or repossess your property.
The debts that are not usually discharged include: student loans, Court fees and penalties, child support, alimony, some types of tax debt, homeowners association fees, and personal injury debts from an accident that are a result of the filing individual’s intoxication.
What Do You Lose? What Do You Keep?
A silver lining to filing a Chapter 7 bankruptcy is that not all the property owned by an individual must be sold. Surprisingly, in Suffolk County individuals are allowed to keep $179,950 of equity in their home and married couples filing for bankruptcy jointly (if both names are on the deed) are able to keep $359,900 of the equity in their home. It is also not uncommon that people retain ownership of items like their car, clothing, furniture, and television. Additionally, there is a jewelry exemption, so you don’t have to sell your wedding ring or other cherished family items (up to a certain value). The guidelines for all the personal possessions that are and are not exempt are extremely long and detailed. Also, in New York State any individual filing for Chapter 7 bankruptcy has the option of using the Federal or the State guidelines for exemptions. Unfortunately, you cannot mix and match guidelines so it would be best to consult with an attorney to determine which set of guidelines maximizes the property you can keep.
Filing for bankruptcy can be a very daunting task. Many people consider filing for bankruptcy to be an admission of failure, but this is a very flawed view. In actuality, bankruptcy is an effective form of debt relief that, when handled correctly, can help people get out of debt without forever ruining their credit. It is a new beginning that allows for financial redemption. If you or someone you know is considering filing for bankruptcy, contact us for a free consultation so we can advise you on the best path forward.