Chapter 7 Bankruptcy

Chapter 7 personal bankruptcy is available for:

• Individuals

• Married couples

• Married people who want to file without their spouse (this is possible)

People who own businesses, such as a sole proprietorship, LLC, or corporation, can also file for personal Chapter 7 bankruptcy.  [See the section below entitled "If I Own a Business, Do I Have to File on the Business Too?"]  If the business itself is filing for bankruptcy, then click here to find out about Chapter 7 business bankruptcy.

What is Chapter 7?

In general, the purpose of a Chapter 7 bankruptcy is to eliminate all of your debts that are considered "dischargeable".  Most types of debt are dischargeable, but a few categories, such as child support obligations, alimony, and student loans, are impossible or nearly impossible to eliminate in a bankruptcy.

Filing for Chapter 7 bankruptcy is an opportunity to emerge out of a financial crisis and get a fresh start.  Chapter 7 is the way to achieve this goal relatively quickly and easily, and is the most common form of consumer bankruptcy filing.

 If there are no objections from any of the parties involved, ordinarily most or all debts would be completely discharged within months of filing a bankruptcy petition, leaving the debtor free of their debt burdens.

Do I Get To Keep My Possessions?

For public policy reasons, bankruptcy does not leave people destitute.  In fact, the bankruptcy code explicitly allows people to keep a wide variety of possessions, to help you get back on your feet.  In fact, most Nevada debtors get to keep all of their possessions, including their car ... if they can afford the monthly payments.

The list of possessions that you get to keep are called exemptions.  The basic rule of Chapter 7 is that all non-exempt property of the debtor is sold via auction, and a one-time distribution of those proceeds is made to your creditors. In contrast, all exempt property is kept by the debtor at the end of the bankruptcy.  In short, you get to keep exempt property, but not non-exempt property.

Fortunately, Nevada has very generous exemptions.  Exemptions vary by category and dollar amount.  Here is the list of the most common Nevada exemptions:

• Household goods, furnishings, and clothing up to $12,000 per person
• One vehicle per person, with up to $15,000 in equity per vehicle
• Up to $5,000 in jewelry and musical instruments per person
• All unemployment compensation (no limit)
• All Social Security income (no limit)
• One gun per person

Because exemptions are per-person, most exemptions can be "stacked" for married couples.  For example, a married couple filing joint bankruptcy can keep $24,000 in household goods, furnishings, and clothing; $10,000 in jewelry and musical instruments; etc.

Dollar amount values for items are self-reported, which means you tell the court what you think your goods or property is worth.  The value of your possessions reported on your schedules should reflect the value of what that item, in that used condition, could be sold for. In other words, value is current market value, not the replacement price or original purchase price.

The general rule of thumb is that you estimate your household goods and jewelry using the price you think you could sell it for on Craigslist, and cars are estimated using the Kelley Blue Book value. On occasion, if you own certain types of collectibles, fancy musical instruments (e.g., grand pianos), fancy cars, and other large-ticket items, we suggest that you have an appraiser come to your house to assess the auction price for those items.  The approximate cost for the appraisals is usually about $30.

The court reserves the right to order an audit of your house, but that happens in only rare instances.

Who Can File for Chapter 7?

Chapter 7 is only available to individuals who make less than a certain amount of income (see Means Testing, below).  Higher-bracket earners who wish to file for personal bankruptcy should consider Chapter 13.  Similarly, debtors with a considerable amount of equity in their home may prefer a Chapter 13 debt adjustment plan.

Also, any person who has been granted a Chapter 7 discharge (or completed a Chapter 13 plan) within the last 8 years cannot file for a Chapter 7 bankruptcy plan.

Chapter 7 Means Test

People who want to file for Chapter 7 bankruptcy have to pass what is known as the "Chapter 7 means test."  The Chapter 7 means test is a formula applied to determine whether or not a prospective debtor has enough income to make some minimal payment to creditors. If so, then those people must file for Chapter 13 bankruptcy instead.

The means test is comprised of two tests; if you pass the first, you qualify for Chapter 7 filing and you do not need to calculate the second:

1. Step 1: A Median Income Comparison compares your income to the median income in Nevada for a family the same size as yours.  If your income is higher than the median income, it does not necessarily mean that you cannot file for Chapter 7 bankruptcy; it just triggers the second step in the test.  The median income thresholds for Nevada (measured using gross pretax income from all sources) to be used for Nevada bankruptcies filed from March 15, 2011 onward are:

   • $43,041   Household size of 1
   • $57,541   Household size of 2
   • $60,783   Household size of 3
   • $70,509   Household size of 4
   • $78,009   Household size of 5

2. Step 2: The second step is quite complicated.  Few attorneys will take the time to discuss Step 2 of the Means Test.  We often find that our clients qualify for a chapter 7 even if they make too much gross income to qualify under Step 1. Certain allowable expenses (determined by IRS guidelines) are subtracted from your income to find your "disposable income."  If your projected disposable income over the next five years totals less than $6,000 ($100/month), you "pass" and can file under Chapter 7.  If your disposable income is greater than $10,000 over the next five years, a presumption arises that you don't really need to file for Chapter 7 bankruptcy, and you will only be allowed to do so if you can demonstrate special circumstances.  In the grey area between $6,000 and $10,000, yet another calculation is required. This one compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible.  If your disposable income over that five years is greater than 25% of your unsecured, non-priority debts, you find yourself in the same circumstances as if you'd had more than $10,000 in disposable income.  If your disposable income over a five year period is less than 25% of your unsecured, non-priority debts, you "pass" Step 2 of the means test.

   Do not be concerned if Step Two seems complex.  We will do all the calculations for you, based on information you provide to us, and tell you whether or not you qualify for Chapter 7.

How Does Chapter 7 Work?

In a Chapter 7 bankruptcy case, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for exempt property, which the law allows you to keep.  In many cases, most or all of your personal property will be exempt.  Property which is not exempt may be sold, and the proceeds from that sale are distributed to creditors.

A trustee is appointed who collects all the non-exempt property, sells only those non-exempt assets (you keep everything else), and distributes proceeds from this sale to appropriate creditors. Chapter 7 is different from other bankruptcy filings because the debtor needs not make a payment to the trustee.

Under Chapter 7 bankruptcy, the debtor receives a discharge on all dischargeable debts. However, there are 19 general classes of debt, such as child support, most taxes and student loans that cannot be discharged under Chapter 7 bankruptcy.  Also, certain credit card charges made in the 60 days prior to filing may not be dischargeable.

An added advantage with Chapter 7 bankruptcy is that by signing a reaffirmation agreement a debtor can continue to pay for a car loan or a mortgage on their home. This agreement is in place because the Bankruptcy Code permits a debtor to elect to retain some property, and continue to make payments on it.

Reaffirmation Agreements

Generally, you may keep your car through a reaffirmation agreement. A Chapter 7 reaffirmation agreement is an agreement between the debtor and a creditor which allows the debtor to keep collateral (e.g., a home or car) in exchange for timely payments. Under a reaffirmation agreement, you essentially agree to continue to make your regular monthly payments to your car lender and/or mortgage company.

Automatic Stay on Collections

After you declare bankruptcy, an "automatic stay" of your debts takes effect. Your creditors will be served with notice of the bankruptcy, and, after receiving notice, they are prohibited from taking certain actions against you while the bankruptcy is pending. If you are contacted by a creditor after filing for bankruptcy, tell us immediately -- it is important that we know not only of improper contacts, but of any possibility that a creditor was omitted from the list of creditors you submitted with your bankruptcy petition, or of the possibility that notice was not properly served to the creditor.

If I Own a Business, Do I Have to File on the Business Too?

In general, the answer to this question is no, but sometimes it's a good idea.  If you own a business and want to file for personal bankruptcy, then please call us to discuss your case.

Two important items to note:

• If your debt is primarily business-related, then you qualify for Chapter 7 without having to pass the income-based "means test" described above!
• If you wish to keep the business open, you can do so if the business has a negative "liquidation value".  Basically, if we can prove to the trustee assigned to your case that the business is worth less than zero, then you can keep it open.

If a business itself (an LLC or corporation) is filing for bankruptcy, then it would file for business bankruptcy (click here for more information on business bankruptcy).

How Much Does Personal Chapter 7 Cost?

Relative to other bankruptcy firms, our fees are about average.  For complex cases, we will charge more, depending on the complexity of the case.  Please call us to discuss your situation and obtain a firm quote.

We offer free phone consultations.  For complicated situtations, or if you are not sure whether bankruptcy is right for you, we also offer an in-person consultation with you for $150, lasting about an hour.  This consultation can be extremely informative and useful in reducing your stress level.  You will know what your legal options are, and leave the meeting with a plan tailored for your specific situation.  Furthermore, if you later decide to proceed with a filing, that $150 fee will be deducted from your filing fees, so it ends up being no additional cost to you.