Chapter 7 bankruptcy discharges (wipes out) virtually all of your unsecured debt:  credit cards, medical bills, collections, negative equity in a motor vehicle or house (many times after a repossession), and any other debts that do not have collateral attached to them.  By discharging these debts in a Chapter 7 bankruptcy, your are able to get a fresh start and begin rebuilding your financial independence.

There are a few exceptions to discharging unsecured debts in a Chapter 7 Bankruptcy. The most common exceptions are unpaid taxes, court fines, and student loans.

The Automatic Stay

Filing a Chapter 7 Bankruptcy petition triggers what is commonly known as an "automatic stay."  An automatic stay prohibits creditors from any further collection activity, contact with the debtor/filers, pursuing a lawsuit, garnishment, or foreclosure proceeding.  Any further action by a creditor must be by court motion and approval of the bankruptcy judge and usually such action is not taken.

The New Bankruptcy Laws enacted in late 2005 prohibit some filers with higher incomes from qualifying for Chapter 7 Bankruptcy.   however, most people will still qualify. 

How High is Your Income?

The New Bankruptcy Laws enacted in late 2005 prohibit some filers with higher incomes from qualifying for Chapter 7 Bankruptcy.   however, most people will still qualify. 

Under the new rules, the first step in figuring out whether you can file for Chapter 7 is to measure your "current monthly income" against the median income for a family of your size in Washington state.

Your "current monthly income" is not your income at the time you file, however: It is your average income over the last six months before you file.  

If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.  The Means Test changes frequently.  For up to date information about the current means test income thresholds and whether or not you qualify, please call us for a free consultation about your case.

The Means Test

The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to pay back a portion of your debt.

To find out whether you pass the means test, you start with your "current monthly income," calculated as described above. From that amount, you subtract both of the following:

Certain allowed expenses, in amounts set by the IRS. Generally, you cannot subtract what you actually spend for things like transportation, food, clothing, and so on; instead, you have to use the limits the IRS imposes, which may be lower than the cost of living in your area.

Monthly payments you will have to make on secured and priority unsecured debts.   Secured debts are those for which the creditor is entitled to seize property if you don't pay (such as a mortgage or car loan).  As mention above, priority unsecured debts are obligations that the law deems to be so important that they are entitled to jump to the head of the repayment line. Typical priority debts include child support, alimony, tax debts, and wages owed to employees.

If your total monthly disposable income after subtracting these amounts is less than $100, you pass the means test, and will be allowed to file for Chapter 7. If your total remaining monthly disposable income is more than $166.66, you have flunked the means test, and will be prohibited from using Chapter 7.

So what about those in the middle? They have to do some more math. If your remaining monthly disposable income is between $100 and $166.66, you must figure out whether what you have left over is enough to pay more than 25% of your unsecured, nonpriority debts (such as credit card bills, student loans, medical bills, and so on) over a five-year period. If so, you flunk the means test, and Chapter 7 won't be available to you. If not, you pass the means test, and Chapter 7 remains an option.

In almost all cases, we are able to qualify people for Chapter 7 bankruptcy if their incomes fall below the state median.  This is because almost all filiers whose income are below the state income can rather easily show less than $100 per month of disposible income---or even no disposible income at all---when taking into account their reasonably monthly living expenses.

Property Must Be Valued at Replacement Cost

Most filers can keep all of their personal property in a Chapter 7 Bankruptcy.  Such property is considered exempt property and cannot be taken by the creditors or the bankruptcy court---you are entitled to keep it.

Under the old law, Chapter 7 filers could value their property at what they could sell it for in a "fire sale" or auction. This meant that used furniture, hobby items, cars, heirlooms, and other property a debtor might want to keep were typically assumed to have little value -- and, therefore, that it often fell well within the "exempt property" categories offered by most states.

Under the new law, you must value your property at what it would cost to replace it from a retail vendor, taking into account the property's age and condition. This requirement is sure to increase the value of property, which means more debtors stand to have their property taken and sold by the trustee.

How Long Will My Case Last?