Chapter 7

About Chapter 7

Chapter 7 is called straight bankruptcy because it is filed for the purpose of discharging out your debts. Chapter 7 generally discharges your obligation to pay back your unsecured debts. An unsecured debt is one that has no collateral guaranteeing the debt. Examples of unsecured debts would be general credit cards, medical bills, and signature bank loans. There are a few types of debts that cannot be discharged in bankruptcy. Examples of such debts would be child support, taxes less than three years old, and government guaranteed student loans.
 

Secured Loans

As to secured loans like a house or car loan, Chapter 7 will allow you to also wipe out the obligation to repay the money but it does not wipe out the lien on the collateral created by the security agreement. What this means is that if you are wanting to keep the collateral, you will have to repay the loan. If you are current on a secured loan, Chapter 7 allows you to keep the collateral and to repay the loan. You can enter into what is called a reaffirmation agreement which is a contract approved by the Court in which you agree to be liable on the debt even though you have filed bankruptcy. On the other hand, if you want to surrender the collateral and wipe out the debt, you can do that also. This is common, for example, where one is "upside down" on a loan like a car note and owes much more than the car is worth.

 

To Qualify

In order to qualify for Chapter 7, you have to pass what is called a means test. The purpose if this test is to make sure you don't make too much income to be allowed to discharge out your debts. If you are at or below the medium income for Arkansas, you do not have to do a means test. If you are above the medium income level, you have to take the means test. The means test calculates the difference between your income and reasonable living expenses. For most people the means test is not a problem and they are allowed to file Chapter 7. Our law firm runs this test for you at no charge during your free initial consultation.

 

Property

One question many people ask is whether or not they can keep all the property they have if they file Chapter 7. For most people, the answer to this question is yes. When you file Chapter 7, the law does not require you to give up all property. You are allowed to keep certain properties that fall under what are called exemptions. The law allows you to exempt and keep several thousands of dollars worth of property. Most people fall well within these exemptions and their case is classified as a "no asset case". This means the property they own is within the exemptions and they are allowed to keep it all.