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Chapter 7 bankruptcy is designed to “wipe clean” or discharge your unsecured debts after you have liquidated and paid to your creditors all of your non-exempt assets. Unsecured debt is debt that has no collateral attached to it. Examples of unsecured debt include most credit cards, medical bills, and deficiency judgments resulting from a foreclosed property or short sales. Certain unsecured debts cannot be discharged in Chapter 7. This includes debt incurred as a result of fraud. Most people who file a Chapter 7 bankruptcy can keep their home, their car, and their furniture while wiping out credit card debt and medical bills.
Eligibility and Qualifications for Chapter 7
If your debts are primarily consumer debts, your income for the six moths before filing bankruptcy determines whether or not you are eligible to file. Chapter 7 has no limits on the amount of debt that you have. The income limitations are published twice per year by the Department of Justice. Click the website of the Department of Justice here to access the current guidelines. If your income exceeds the published guidelines, our office will calculate a “means test” to see if you can still qualify. The means test looks at various household expenses that you have and compares them to the total amount of debt you have. If you pass the means test, you can still file Chapter 7 even if you income exceeds the amounts published in the U.S. trustee’s website. If you don’t pass the means test, you cannot file Chapter 7. Instead, you must file a Chapter 11 or Chapter 13 case and pay the amount of your disposable income over 5 years.
Classification of Debt in Bankruptcy
Provided you are eligible to file Chapter 7 bankruptcy based on your income, you will then have to classify your debts. In bankruptcy, debts are classified into three categories: secured debt, unsecured debt, and priority debt. Secured debt is debt that has collateral attached to it. Examples of secured debt are your home and your car. Some department store cards are secured by the items you purchased. When you file Chapter 7 bankruptcy, you have to tell the court what you want to do with those items. You have the option of keeping the property and paying for it or giving the property back to the creditor and not paying for it. A priority debt is debt that has no collateral; however, even if you file bankruptcy, you still have to pay the debt. Examples of priority debt are IRS debts that are less than three years old and child support. Unsecured debt is debt that has no collateral. Examples of unsecured debt are most credit card debt and medical bills. If you file Chapter 7 bankruptcy, you only have to pay your unsecured creditors an amount equal to the non-exempt assets that you have.