Friday, January 16, 2015

Chapter 7 Bankruptcy In Depth


DISCHARGE- "to relieve of a burden" "to set aside, dismiss, annul"
      To receive a Discharge is the primary purpose of filing bankruptcy.  The bankruptcy Discharge is an injunction, a Court Order that permanently bars collection of debts, thereby relieving a debtor of the obligation to pay.  The right not to pay tens of thousands or hundreds of thousands of dollars in debt is a valuable life-changing right.
Please treat the requirements and obligations to obtain a discharge with the seriousness they deserve.

Below is a good plain language summary of nondischargeable debt.

Highlights of Nondischargeable debt are below:
  • unscheduled debts
  • certain taxes 
  • debts for spousal or child support or alimony 
  • debts owed to a former spouse or child if they arose out of a divorce or separation, including attorney fees
  • debts to government agencies for fines and penalties
  • debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated (or other intentional torts)
  • debts owed to certain tax-advantaged retirement plans
  • court fines and penalties, including criminal restitution.
      Your debt-to-income ratio is a useful tool in analyzing whether considering bankruptcy is appropriate for you.

Your debt to income ratio is the relationship between the amount of your monthly debt payments (excluding mortgage or rent) and the amount of your income. For example, if your net income is $2,000 and you make $400 in payments on loans and credit cards, then your debt to income ratio would be 20% ($400 divided by $2,000 = .20).

According to American Consumer Credit Counseling (ACCC) below is a chart of the level of risk associated with various debt to income ratios.
Less than 10% Great Shape
10-20% Good Credit Risk
20-35% Questionable Credit
35% or Higher High Credit Risk
An increase in debt is the same as a decrease in income.
The ratio can also be calculated with gross annual income and total debt.

      Qualification for Chapter 7 requires satisfying 3 criteria: (I) income; (II) assets; and (II) prior discharge.
                           I. Income Relative to the Median for Your Family Size
Below is a chart of the median income by family size from data compiled by the US Census Bureau applicable to cases filed after 11/01/2015.
Family Size 1 2 3 4 5 6
Annual Gross $56,365 $68505 $78,227 $86,782 $94,882 $102,982
Monthly Gross $4,697 $5,709 $6,519 $7,232 $7,907 $8,582
      If your income is below the median for your family size then you are income qualified for Chapter 7. If your income is above the median then, you must take and pass the “Means Test” in order to qualify for Chapter 7. The Means Test is a formula of average living expenses by category for this region from data compiled by the IRS. The factors that influence the Means Test the most are mortgages, car payments, child support & spousal support.

                                             II. Assets (Exempt or Non-Exempt?)
      More than 98% of Chapter 7 filers in Washington State have no non-exempt assets. Exempt assets are the assets that Debtors get to keep. Non-Exempt Assets are luxury goods such as boats, aircraft, horses, expensive jewelry or antiques. Debtors have a choice of either surrendering the Non-Exempt Asset or paying the Non-Exempt value that the creditors would have received if the asset had been sold. Frequently, this results in a conversion to Chapter 13 to pay the amount over 5 years. Below are the Federal Exemption amounts and statute citations.
Federal Exemption Statutes


Household Goods 11 USC § 522(d)(3) 12,250 24,500
Jewelry 11 USC § 522(d)(7) 1,550 3,100
Life Insurance Proceeds 11 USC § 522(d)(8) 12,250 24,500
Motor Vehicle 11 USC § 522(d)(2) 3,675 7,350
Personal Injury Payments 11 USC § 522(d)(11) 22,975 45,950
Real Property 11 USC § 522(d)(1) 22,975 45,950
Tools of the Trade 11 USC § 522(d)(6) 2,300 4,600
Wildcard - Unused amount of 522(d)(1) 11 USC § 522(d)(5)

Retirement Accounts 11 USC § 522(d)(12) Unlimited Unlimited

             III. Prior Discharge Could = Ineligible for Another Discharge   
Debtors are only eligible for a Chapter 7 discharge after 8 years have passed since filing a previous chapter 7 in which the Debtor received a discharge.

11 USC 727(a)(9) sets forth the 6-year bar rule for a Chapter 7 discharge following a Chapter 13 discharge, unless the debtor repaid 100% of unsecured claims or paid 70% and the Court finds that the plan “was proposed by the debtor in good faith, and was the debtor’s best effort.”

 14205 SE 36th St Ste 100
Bellevue, WA 98006-1553
Phone: 425-649-1190
Fax: 425-223-3197

Mulvaney Law Offices, PLLC, is a "debt relief agency" under federal law because we help people file cases under the U.S. Bankruptcy Code.

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