Individuals and in some cases businesses, with few or no assets typically file Chapter 7 bankruptcy. It allows them to dispose of their unsecured debts, such as credit card balances and medical bills. Those with non-exempt assets, such as family heirlooms (collections with high valuations, such as coin or stamp collections); second homes; and cash, stocks, or bonds must liquidate the property to repay some or all of their unsecured debts. A person filing Chapter 7 bankruptcy is basically selling off their assets to clear their debt. People who have no valuable assets and only exempt property such as household goods, clothing, tools for their trades, and a personal vehicle worth up to a certain value may end up repaying no part of their unsecured debt.
Understanding Chapter 7
In Chapter 7 bankruptcy the absolute priority rule stipulates the order in which debts are to be paid. Under this rule unsecured debt is separated into classes or categories, with each class receiving priority for payment. Secured debt is debt backed or secured by collateral to reduce the risk associated with lending, such as a mortgage. Unsecured priority debts are paid first. Examples of unsecured priority debts are tax debts, child support, and personal injury claims against the debtor. Secured debts are paid next. Last is the payment of non-priority, unsecured debt with funds remaining from the liquidation of assets. If there are not sufficient funds to pay the non-priority unsecured debt, then the debts are paid on a pro-rata basis.
Advantages of Chapter 7 Bankruptcy
Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here’s how it works:
• It’s relatively quick: A typical Chapter 7 bankruptcy case takes three to six months to complete.
• No payment plan. Unlike Chapter 13 bankruptcy, a filer doesn’t pay into a three- to five-year repayment plan.
• Many, but not all debts get wiped out: The person filing emerges debt-free except for particular types of debts, such as student loans, recent taxes, and unpaid child support. You can protect property. Although you can lose property in Chapter 7 bankruptcy, many filers can keep everything that they own. Bankruptcy lets you keep most necessities, and, if you don’t have much in the way of luxury goods, the chances are that you’ll be able to exempt (protect) all or most of your property.
• You can keep a house or car in some situations. You can also keep your house or car as long as you’re current on the payments, can continue making payments after the bankruptcy case, and can exempt the amount of equity you have in the property.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 bankruptcies known as the liquidation chapter, allows qualifying individuals to eliminate their unsecured debt. This form of bankruptcy will require that your non-exempt assets be sold to pay back your creditors. Chapter 7 can allow for total elimination of your debt, but not everyone will be eligible to seek a Chapter 7 action, and those with significant assets may not wish to. Chapter 13 bankruptcy, on the other hand, is known as the reorganization chapter. This form of bankruptcy allows those with assets or individuals who do not meet the income limits in Chapter 7 to still pursue bankruptcy. It will involve repayment of your debts over time. In many cases, Chapter 7 bankruptcy is a better fit than Chapter 13 bankruptcy. For instance, Chapter 7 is quicker, many filers can keep all or most of their property, and filers don’t pay creditors through a three to five year Chapter 13 repayment plan. But not everyone qualifies to file for Chapter 7 bankruptcy and in some cases; Chapter 7 doesn’t provide the help the filer needs.
Who Should File for Chapter 7 Bankruptcy?
Chapter 7 works very well for many people, especially those who:
• own little property
• have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy), and
• whose family income doesn’t exceed the state median for the same family size.
You’ll take the means test to see if your income qualifies for this chapter. If your income is below the average income for a family of the same size in your state, you’ll automatically qualify. If your income is higher than the median, you’ll have another opportunity to pass. However, if after subtracting allowed expenses, including payments for child support, tax debts, secured debts such as a mortgage or car loan, you have income left over to make a significant payment to your creditors, you won’t qualify to file for Chapter 7 bankruptcy.
Chapter 7 Income Limits in Utah
To file for a Chapter 7 bankruptcy in Utah, you must meet the means test. The means test will first compare your income to that of the median household income for a family of your size in Utah. Currently, the median income for single adults in Utah is $48,596. This figure will vary by year. If you make under the median income, then you pass the means test. If you make over the median income, you could still qualify, but it becomes necessary to examine your disposable income. Bankruptcy courts will allow you to deduct reasonable expenses to arrive at your actual disposable income. Allowable expenses could include living costs, household supplies, apparel, health care, and the like. The amount of disposable income you have left once these allowable expenses are deducted will determine whether you can pursue a Chapter 7 case. Your bankruptcy lawyer will assist you in reviewing your income, expenses, and more to uncover what the best avenue for you might be when considering filing for bankruptcy. If you are struggling with oppressive debt, it may be time to consider filing for bankruptcy. Bankruptcy can offer a means for those burdened by debt to erase their debt or reorganize it so that they can start living and enjoying life again. Those considering filing for bankruptcy will first need to consider which type of bankruptcy they qualify for and what will best suit their needs. For individuals, Chapter 7 and Chapter 13 are the main choices.
What Is The Means Test?
In 2005, congress made some revisions to existing bankruptcy laws. Among these changes was the addition of the Means Test or, as it is more formally known, Bankruptcy Form 122A or 122C, depending on whether you are filing Chapter 7 or 13. This document has to be completed and filed with the court to determine whether or not you make too much for a Chapter 7 bankruptcy. You must disclose all income (except for Social Security and VA Disability Income), including wages, investment income that you regularly receive (like from a rental property that you own), child support and alimony, and retirement from the last six months. You will then take this 6-month total and double it to come up with a new total your annual income. If your annual income exceeds the median income for a family of the same size in the State of Utah, then you are presumably ineligible for chapter 7 (but not always there is some tricky math that comes into play here; talk to a bankruptcy attorney if you are over median but have your heart set on a chapter 7). If your means test shows that you don’t qualify for Chapter 7, that doesn’t mean that you can’t file bankruptcy at all. Chapter 13 is still a great option even better, in many cases!
Passing the Means Test
In order to pass the means test, you must have little or no disposable income. To determine whether you qualify for Chapter 7 bankruptcy, the means test compares your average monthly income for the six-month period preceding your bankruptcy against the median income of a similar household in your state. If your income is below the median, you automatically qualify.
Your Options If Your Income Is Above the Median
But what happens if your income is above your state’s median? Many debtors think that such a scenario represents the endgame for them, that there is no way they can file a Chapter 7 bankruptcy with their income being so high. This is not necessarily true. If your income is above median, you must complete the entire means test form instead of qualifying simply based on your income. The means test is essentially a balancing stage where your expenses are weighed against your income. But keep in mind that you can only use your actual expenses for certain items. For many expenses, the means test only allows you to deduct the national or local standard living allowance. If deducting all allowable expenses from your income results in little or no disposable income, you can file for Chapter 7 bankruptcy. If your expenses are less than your net income, you probably cannot file a Chapter 7. While this may seem simple enough to determine, bear in mind that the value of a given expense depends on a number of complicated formulas. For this reason, it is very important to speak with an experienced bankruptcy attorney before taking any course of action.
How to Qualify for Chapter 7 Bankruptcy
If you’re struggling with debt, you may consider filing Chapter 7 bankruptcy to wipe the slate clean and start over with no outstanding debts. A Chapter 7 bankruptcy is a type of bankruptcy in which certain property is sold and used to repay all or some of your debts. If you don’t have property that can be resold, many of your debts will be discharged, or cancelled, at the end of the bankruptcy case. Not everyone is eligible to file Chapter 7 bankruptcy, particularly people with high incomes who could afford to repay their debts through Chapter 13 bankruptcy. Here is a list of criteria that qualifies you for Chapter 7 bankruptcy. The bankruptcy means test compares your monthly income of the state’s median family income for a family of your size.
If your monthly income exceeds the state’s median income, you may not be able to file Chapter 7 bankruptcy. The means test is required if more than half your debt comes from consumer purchases rather than business, tax, or tort debts. Tort debts are debts for injuries or damages you caused to someone else. If your income does not meet the means test, it could indicate that you have enough money left after paying bills to repay some of your debts. The bankruptcy law prevents people from repeatedly running up debts and having them discharged in bankruptcy court. You aren’t legally able to file Chapter 7 bankruptcy if you had a previous Chapter 7 bankruptcy discharge within the past 8 years or a Chapter 13 bankruptcy discharge within the past 6 years. The filing period starts from the date your previous bankruptcy was filed rather than when the bankruptcy was discharged. The cut-off income for filing Chapter 7 is the median amount a family your size makes in your state. This number will change from time to time, but as of June 2020, Utah’s median income for a single person was $64,806. For a two-person family, it was $69,006, and for a family of three it went up to $82,638. If the amount you brought in over the past 6 months is too high for you to be eligible for Chapter 7 bankruptcy in Utah, don’t worry you can still file Chapter 13. In some cases, you may still be eligible for Chapter 7, but that will have to be assessed with your lawyer on a case-by-case basis. Honestly, Chapter 13 can be a much more desirable option anyway, and even if you do qualify for Chapter 7 you may choose to go this route. This is because you risk losing crucial assets such as your home and vehicle with a Chapter 7, but with a Chapter 13 you get to keep pretty much everything you currently have with no risk of seizure. Thanks to the 2005 bankruptcy law changes, the debt you actually have to pay is just a fraction of the amount you currently owe. What this means is that, through the consolidation program put forth by Chapter 13 bankruptcy, you will pay less both on a monthly basis and in the long run. And remember, no matter the monthly payment you set up, it is always going to be less than having your wages garnished.
Chapter 7 Bankruptcy Lawyer
When you need to file for bankruptcy in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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