Clients often come to me seeking bankruptcy help because they have lost their job, had an illness or injury that resulted in large medical bills, or suffered other causes beyond their control which prevent them from paying their debts on time. Being powerless to stop debt collectors from harassing you for payments you cannot make puts an incredible stress on you and your family. If you have modest assets, a Chapter 7 personal bankruptcy can wipe out most of your debts. Chapter 7 bankruptcy is a liquidation case that typically ends when you receive an order of discharge, wiping out your personal liability to pay debts. Not all debts are wiped out and exceptions include student loans, family support obligations, most taxes, debts from fraud, and intentional injuries or damages for driving under the influence of drugs or alcohol.
Whether you are eligible for a chapter 7 bankruptcy will depend on whether you own significant non-retirement assets as well as your last 6 months’ income. If your income is below the state median or if your debts are mostly from business, you are generally eligible for Chapter 7. Even if your income is higher than the median, you may still qualify for Chapter 7 if you can pass a “means test”. The means test is a statutory maze of income and expense calculations, composed of real and IRS created standards, used to determine if you have the ability to pay back some of your unsecured debt over a 5 year repayment plan. If you fail the means test, you typically need to file Chapter 11 or 13 to get any bankruptcy relief.
In most Chapter 7 cases, you will be able to exempt all of your assets under applicable Michigan or Federal Bankruptcy laws. However, if there are assets that do not qualify for an exemption, the Chapter 7 bankruptcy trustee has the power to liquidate or sell those non-exempt assets and distribute the proceeds from the sale to your creditors. In practice, however, liquidation is rare. Chapter 7 Trustees do not sell properties that have no equity, such as a house that is worth less than the sum of the loan balances. Most assets are encumbered by liens or fall under the “exempt asset” category, preventing the trustee from liquidating.
Retirement accounts are generally not counted towards your exempt assets in a Chapter 7 case. A person filing a Chapter 7 case will be allowed to keep retirement accounts in an amount that is reasonably necessary for his or her retirement. This is why I advise clients not to deplete their retirement accounts if they are having financial difficulties and may file for bankruptcy protection in the future.
After your Chapter 7 petition has been filed, the court will hold a hearing during which time the bankruptcy trustee and your creditors will have the opportunity to ask you questions under oath. I will discuss what you can expect and help you prepare for the hearing beforehand. Usually, these hearings are short and routine. If there are no issues, the trustee will later issue his report to the court and you will receive an order of discharge of your listed debts.