Most individuals who file for bankruptcy use Chapter 7. When you’re overwhelmed by debt and hounded by creditors, Chapter 7 bankruptcy offers a path to a clean slate. It can help you get out from under most of your debts so you can start fresh.
Such a clean slate doesn’t come for free, however, and isn’t something you can take without genuine need. Our team at Integrity Law Group can help you determine if Chapter 7 bankruptcy is right for you and guide you through the process to an optimal outcome. Here, we’ll discuss how it works, how you qualify for Chapter 7, and the liquidation of non-exempt assets.
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How Chapter 7 Bankruptcy Works
Chapter 7 is one of two common types of bankruptcy for individuals. While Chapter 13 bankruptcy involves creating an extended repayment plan for your debts Chapter 7 helps you escape them entirely. Consequently, you can only qualify for Chapter 7 if you are below a certain income threshold or if other income exemptions apply.
The Means Test
Chapter 7 bankruptcy eligibility is determined by the means test. If anyone could use Chapter 7 to escape debts, it would be abused as an easy way to get out of payments.
First, the debtor’s monthly income is calculated, including wages, bonuses, interest, and any other type of monetary compensation. If their monthly income is below the state median after making permitted deductions, they qualify for Chapter 7 bankruptcy. If it isn’t, there will be additional calculations to determine their disposable income and whether they should have sufficient income to repay their debts.
Liquidating Assets: Exempt vs. Non-Exempt Assets
While the benefit of Chapter 7 bankruptcy is to discharge debts, non-exempt assets may first be sold. A trustee will be appointed to handle this process for your case. They will liquidate all your non-exempt assets and distribute the earnings to your creditors.
However, most if not all of your property and belongings will be protected as non-exempt assets. A debtor without these non-exempt assets will still get many of their debts discharged.
Exempt Assets
Exempt assets are those considered necessary for work and for a basic standard of living. That’s why your house, car, and many personal possessions are usually exempt. Things like clothing and household goods should be exempt. Tools and items for your work will also be exempt.
However, there is a limit–these items usually must be below a certain value to be exempt. An average commuting car might be exempt, but an expensive sports car probably won’t be. Reasonable, necessary clothing should be exempt, but expensive designer brands may be non-exempt. In some cases, your house may not be entirely exempt–only part of its equity may be protected. Having a bankruptcy lawyer on your side to help protect as many of your assets as possible is essential.
Here are a few other assets that are usually exempt:
- Child support
- Life insurance
- Retirement accounts
- Pensions
- Public benefits like social security
- Damages from a personal injury claim
Non-Exempt Assets
Non-essential and high-value items may be liquidated by the trustee to pay off your debts if they are not exempt through wildcard provisions. Common non-exempt items include:
- Secondary cars, boats, and recreational vehicles
- A second house or extra property with non-exempt equity
- Bank accounts, cash, and investments that are not exempt
- Family heirlooms
- Collectibles
- Expensive jewelry, clothing, musical instruments, or luxury items
Many states, including Washington, give a “wildcard exemption” that allows you to keep a certain amount of personal property of your choosing.
Get Started with a Bankruptcy Lawyer Today
Chapter 7 bankruptcy is often a relief from extreme financial distress. It can give you a fresh start by discharging several of your debts. For most individuals who pass the means test to qualify for Chapter 7, very little of their assets will be non-exempt and subject to liquidation. Still, it’s crucial to work with an experienced bankruptcy attorney who can help you navigate the system and protect your assets.
Integrity Law Group is here to help you get a fresh start with Chapter 7 bankruptcy in Seattle. Contact us today to schedule a consultation.