With several exceptions, Chapter 7 Bankruptcy eliminates most debts.  The most common exceptions are student loans, taxes, child support, civil fines and criminal fines.  Although student loans are generally not dischargeable, due to extreme hardship the court can find student loans dischargeable.  The court applies a very restrictive definition in determining what constitutes an extreme hardship.   On the other hand, although the general rule is that taxes are not dischargeable, income taxes may be discharged under certain circumstances. Child Support payments, civil and criminal penalties are never discharged in bankruptcy.

   A debtor that files a Chapter 7 Bankruptcy is allowed to keep certain property, which is termed “exempt” property. Each state may choose to apply federal exemption laws, its own exemption laws or a combination of both.  New York has elected to use its own laws to determine which property is exempt.  Among the most commonly exempt assets are the following:  

• $2,500 in cash and $2,500 in wearing apparel and household furniture, or $50,000 in equity in a home that is located in New York and the principal residence of the debtor;
• a car with up to $2,400 in equity,
• qualified retirement plans, such as 401k and 403b plans,
•  IRA plans,
• up to $600 in work tools,
• personal injury compensatory recoveries to up to$7,500 (not to include pain and suffering), and
• security deposits.  

      * A married couple can file together and double these amounts. 

   Chapter 7 Bankruptcy is an option to individuals with incomes at or below the median income of the state in which the debtor resides. For the year 2009 the median incomes in New York are as follows: 

• Family of one $46,523;
• Family of two $57,006;
• Family of three $67,991;
• Family of four $83,036.

For households larger than four, $6,900 is added for each additional family member. These figures are revised at the beginning of each year. Click here to learn the current median income for your state. Means Testing.

    In the event the debtor’s income is above the median income, a “means test” is applied to determine whether Chapter 7 Bankruptcy is allowed under the Bankruptcy Code. For more information on the means test*. If the debtor fails the “means test,” Chapter 13 Bankruptcy may still be an option. Means Testing.

   A debtor that files a Chapter 7 Bankruptcy must complete credit counseling and a class in Personal Financial Management, both of which are required by the Bankruptcy Code. The credit counseling and educational course can only be given by a court-approved organization. The courses are given over the internet or telephone. The credit counseling must be completed within the 180 days (6 months) prior to the filing of the bankruptcy petition. The Personal Financial Management class must be completed after the filing of the bankruptcy petition.  A certificate of completion must be filed with the court within 45 days of the date of the first meeting of creditors.  A failure to file this certificate on-time will result in the bankruptcy petition being dismissed.

   Ordinarily, there is only one hearing before the Bankruptcy Trustee, which is known as the “first meeting of creditors.” This name is something of a misnomer, because although creditors are invited to the hearing, it is very unusual for any of them to appear.  At the hearing the debtor is asked questions by the trustee.  The trustee is appointed by the court and is responsible for ensuring that the debtor hasn’t committed fraud. The trustee is also tasked with looking for nonexempt assets for the benefit of the creditors.  After all the trustee’s questions have been asked and answered satisfactorily, the trustee will close the meeting.  If the trustee does have further questions, he or she will schedule a second meeting.

   If a debtor wishes to keep a debt, he or she must sign a reaffirmation agreement, stating that the debtor shall continue to be liable for a debt.  Reaffirmation agreements are usually used by debtors who wish to keep a home or car.  The reaffirmation agreement must be signed by the debtor, creditor and if the debtor is represented by an attorney, then by the attorney as well.  The reaffirmation agreement must then be filed with the bankruptcy court.

   Approximately three months after filing the bankruptcy petition, a discharge is usually issued by the bankruptcy court.  The discharge releases the debtor from liability for all dischargeable debts.

   Creditors have two months from the first meeting of creditors in which to file an objection to the discharge. Objections are typically made when a debtor has made significant use of credit shortly before filing for bankruptcy.  If an objection is not made within the allowed period of time, the creditor will forever be barred from making an objection to the debt being discharged.

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