Passing the Means TestBefore you even consider filing a Chapter 7 bankruptcy, you should first find out if you are even eligible. The "means test" is implemented to prevent fraud and abuse of the bankruptcy system because liquidation of debt is involved. The test will determine your eligibility based on your income and assets to see if you really are in need of a Chapter 7 filing. There are certain calculations and state laws that come into play, so be sure to contact a bankruptcy attorney to help you determine your eligibility.
Have You Filed Before?Another deterrent of fraud and abuse is the consideration of your past filings for bankruptcies. If you filed a Chapter 7 bankruptcy in the past, you will not be eligible to file another for at least 8 years. A common occurrence is the conversion of a Chapter 13 filing into a Chapter 7 bankruptcy. In this case, eligibility will be determined again by a new means test. It is important to note that converting your Chapter 13 bankruptcy to a Chapter 7 will lower your credit score since two bankruptcies will now show up under public records.
Non-dischargeable DebtsThere are debts considered obligatory and non-dischargeable, which means a Chapter 7 filing will not eliminate these debts. Since laws vary state to state, it is best to consult with a local bankruptcy attorney to determine which of your debts will be considered non-dischargeable. The most common obligatory debts include child support, alimony, income tax debts, and student loans. If these are the majority of your debts, it might not make sense to file a Chapter 7 bankruptcy since they will still remain after the discharge.
Non-Exempt PropertyYour property will be categorized as exempt and non-exempt property, with the non-exempt property at risk for liquidation. Most commonly, the type of property at risk are real estate, vehicles, and financial accounts. As a result, before considering a Chapter 7 bankruptcy you should first evaluate how much of your personal property might be at risk.
Shopping Sprees Are ForbiddenA Chapter 7 filing will liquidate credit card debt and personal loans; to avoid fraud and one last shopping spree, this limitation is enforced. Purchases made within 90 days by credit cards that are in excess of $1150 for luxury goods or services are considered non-dischargeable. Personal loans or cash advances made within 70 days also considered non-dischargeable. Furthermore, keep in mind that such fraudulent activity can lead to having your case dismissed entirely.
Don't Forget About Your CosignersIf you have debt or loans where someone cosigned for you, keep in mind that they will be held liable. Certain types of debts will be discharged, but the co-debtor will always be responsible. So while you may be given a "fresh start" with a Chapter 7 filing, your co-debtors will still be responsible for your debt.
While a Chapter 7 bankruptcy is sensible for some, it is important to find out what other options are available. Chapter 7 is usually the most attractive bankruptcy filing at first, but if you keep these 6 things in mind, you may just find another alternative better for you.
About the Author:
Heindrick So works for a Bay Area Real Estate company that specializes in residential wholesale lending. His work experience is comprised mostly of sales and marketing background which included a high end media sales position at Magnolia Hi-fi. Heindrick is also in his final year of pursuing his Bachelor's Degree in Electrical Engineering at San Jose State University.