The most common type of bankruptcy is Chapter 7. This type of bankruptcy is designed for people who, for one reason or another, cannot pay their existing debts. Chapter 7 bankruptcy is appropriate for people who have lost jobs since it relieves them of their debt obligation.
Not all debts are allowable under bankruptcy laws. Student loans and IRS debts are two examples of debts that still must be paid, even in the event of filing Chapter 7. There are, however, some tax debts that can be discharged. Your bankruptcy attorney can explain those laws to you. You also cannot discharge debts that were obtained fraudulently such as a debt you made while knowing that you were going to file bankruptcy. Child support payments and court-ordered fines are also exempt from bankruptcy. The same goes for alimony payments.
Debts that are allowed under Chapter 7 are credit cards, personal loans, medical bills, utility bills, overdraft charges, and a small number of tax obligations. If you file on secured loans you will forfeit the security. For example, if you have an automobile that you owe $8,000 on, you will have to forfeit that vehicle.
There are certain personal assets that you will be allowed to keep, even if you file Chapter 7. Bank accounts that have up to $2,500, household furniture with a value up to $5,000, homes with equity up to $50,000, automobiles with equity up to $2,400, personal possessions such as clothing, jewelry, to be combined with the total person assets up to $5,000, and retirement accounts of any value.
You can opt out of filing bankruptcy on any debt if you intend to repay that debt. For example, if you do not want to lose your automobile and you feel that you can meet your monthly obligation, you can choose to continue with your automobile payments and keep your automobile. You do, however, have to report your intentions regarding your automobile debt to the bankruptcy court.
Due to the new bankruptcy laws that were put into place in October 2007 there are certain limitations on filing Chapter 7. People who wish to file Chapter 7 must pass a test known as the means test”. This is a test of income to determine if you have enough income to satisfy at least part of your debt. If your income is too high to meet the Chapter 7 requirements you may be asked to switch to another type of bankruptcy such as Chapter 13.
Many people who file Chapter 7 do not actually lose any of their possessions since a large part of the Chapter 7 filers are filing on credit card debt and medical bills. Those who wish to also include their automobiles and mortgages in the Chapter 7 will walk away from those debts but they will also be giving up those items. In the case of a mortgage the home will be returned to the financer. They will then attempt to sell the home to recoup some, or all, of their losses. Automobiles will also return to the loan company or bank for resell.