If you are considering a bankruptcy filing, you might be entering unfamiliar territory. The below financial-related bankruptcy terms represent some important facets of a Chapter 7 filing that most filers should become familiar with before they file. Read on so you'll gain a better understanding of the legal action you are about to undertake.
The retooling of the bankruptcy code a few years ago brought about a requirement that filers participate in two educational exercises. Since one class must be completed before you file, it's important to understand them and the impact they could have on your bankruptcy.
These two terms are used interchangeably to mean the debt goes away completely with a Chapter 7 filing — although the term discharge is a more accurate way to describe the action. Since not all consumer debt can be discharged, it's important for filers to understand what can and cannot be discharged. For example, if you owe the IRS money for taxes, not all of it can be discharged. Other forms of debt that cannot be discharged are back child support obligations and some legal debts.
Exemptions are probably one of the most confusing aspects of a Chapter 7 filing. An exemption is an asset or a dollar amount connected to an asset that makes it safe from seizure. Each state has different exemptions. In some states, for example, your primary residence is safe from the bankruptcy courts. In other states, a certain amount of home equity is safe. Besides homestead exemptions, you might also find exemptions for work tools and equipment, salaries, heirlooms, and more.
Another new rule created as a result of the code re-do is the means test. Filers must compare their income to the median income of their state. If they make more money than the state's median, they must take the means test. This test does a deeper dive into the income and financial obligations of the filer. If you are unable to pass the means test, you might want to consider a Chapter 13 filing instead.
With Chapter 7, the bankruptcy courts have the power to seize the personal property of the filer and sell it. Any funds garnered by these actions go to pay bankruptcy administration costs, the bankruptcy trustee's salary, and certain priority creditors.
The above common terms should help to get you started, but there is more to learn from your bankruptcy lawyer. Contact a lawyer to get some personalized information and recommendations and to get ready for the debt relief you need.