KEEP YOUR PROPERTY.
Chapter 7 in Renton
If you find that your income is not enough to pay your debts after paying for necessities and making payments on a mortgage or car loan, Chapter 7 is probably right for you. Chapter 7 is right for wiping out unmanageable “unsecured debt”, which is debt that is not “secured” by a home, car, etc. Examples of unsecured debt are credit cards, medical bills, pay day loans, signature loans, car deficiencies, claims for an uninsured accident and light or phone bills.
A Chapter 7 is known as a “liquidation bankruptcy” because creditors can be paid by a trustee liquidating, or selling for cash, unexempt property. Most of the time, the trustee is not able to sell your property because it is exempt. The law provides exemptions so you can keep your important property, such as household goods, a car, your home, retirement accounts, some cash or bank accounts, proceeds from a law suit and jewelry.
Property that you are making payments on can be retained by continuing to make the payments. You may have to sign a reaffirmation agreement, which takes the debt outside of the bankruptcy discharge. Signing the reaffirmation agreement is risky, especially for a car, because you may be on the hook for the loan if you default in the future. You may want to ask your car finance company if they require a reaffirmation agreement in Chapter 7.
If you make over the median income, you must complete a means test which deducts expenses from your past six months of income to see if you have any money left over for your unsecured creditors. You can deduct secured debt payments like your mortgage or car loan in the means test, along with expenses like taxes, child care, health insurance and child support. Other expenses deducted from the means test are set by IRS regulations. If your income is below the median income for your household size and state, you do not have to fill out the rest of the means test and you “qualify” for Chapter 7.
Not qualifying means the bankruptcy court decides you are abusing the bankruptcy system by filing Chapter 7 and can force you to convert to Chapter 13 or dismiss your case. You may have special circumstances, such as a sudden drop in income that is unlikely to change. In that case even if you do not pass the means test, you may be able to show that you are not abusing the bankruptcy system by filing a Chapter 7.
Many people would much rather file a Chapter 7 because it is relatively cheap, quick and most people do not lose any property. Most cases only involve one short hearing about a month after you file and end in a discharge three months after you file. After that, you have a fresh start and the deadline for creditors challenging your case has passed.