What is Chapter 7 Bankruptcy?
According to worldatlas.com, the state of Kentucky ranks eighth in the nation for bankruptcy rates, with 391 bankruptcy filings per 100,000 residents. The national bankruptcy rate is 226 filings per 100,000 residents. According to experts, wage stagnation, unemployment, student loan debt, and unexpected medical bills are the driving forces behind bankruptcy filings rather than consumers living frivolously. Personal bankruptcy rates have increased dramatically over the past twenty-five years, with bankruptcy cases reaching an all-time high in 2005 when one out of every 55 American households filed for bankruptcy. The average age of a person filing bankruptcy in the U.S. is 38, and almost half of all bankruptcies are filed by couples.
Chapter 7 bankruptcy can give you a fresh start, financially speaking. While deciding to file for bankruptcy is never an easy decision, there are definitely times when it can be your best option. Chapter 7 bankruptcy is essentially a liquidation—the bankruptcy trustees collect all of your non-exempt assets, selling them and distributing the proceeds of the liquidation to your creditors. The bankruptcy trustees will also be paid a commission out of those proceeds.
Qualifying for Chapter 7 Bankruptcy in Kentucky Via the Means Test
Qualifying for Chapter 7 bankruptcy requires that you pass the means test, which has two parts. If your income is below the average income for a Kentucky household with the same family size, you automatically qualify to file Chapter 7 bankruptcy. If your reasonable and allowed expenses, once deducted from your income, leave no disposable income to may Chapter 13 payments, you will also likely qualify to file under Chapter 7 bankruptcy.
The means test to determine whether you qualify for Chapter 7 bankruptcy averages your income over the past six months in order to calculate your annual income. There are no debt limits in a Chapter 7 bankruptcy filing, and both individuals and corporations can file for Chapter 7 bankruptcy so long as the means test is passed. The median income changes from year to year and differs from state to state. In fact, even different counties within the same state will have somewhat different median incomes. In 2017, the median income for a one-person household in the state of Kentucky was $40,633. The median income was $47,788 for two people in a household, $57,696 for three people in a household and $67,839 for four people in a household.
In certain cases, if your income is higher than the median family income, you may still pass the bankruptcy means test and could still be able to file Chapter 7 bankruptcy—if there is $150 or less in disposable income after deducting for reasonable and necessary expenses. A sudden disability could allow you to file under Chapter 7 bankruptcy even if you do not pass the means test, so long as you can explain the circumstances. If you have a seasonal income, you could also be able to show that the means test should not be the basis for being denied the ability to file Chapter 7 bankruptcy.
What are the Exemptions for a Chapter 7 Bankruptcy?
Perhaps the primary question asked by those who are considering bankruptcy is whether or not they can keep their home. Exemptions vary significantly from state to state; the state of Kentucky allows bankruptcy filers the choice between using federal bankruptcy exemptions or Kentucky bankruptcy exemptions. Unfortunately, you are not allowed to “pick and choose” between federal and state exemptions, say, using the Kentucky homestead exemption, but federal exemptions for personal property. The following Kentucky vs. Federal bankruptcy exemptions are allowed under a Chapter 7 filing:
- Kentucky allows a $5,000 homestead exemption (equity in your home), which can be doubled if you are married and filing jointly. The federal homestead exemption, by contrast, is much more generous–$23,675 in equity for your primary residence.
- Kentucky allows an exemption of $3,000 in personal property, such as household furnishings, while federal law allows $12,625 on household goods. Federal law also allows a wildcard exemption on household goods–$1,250 plus $11,850 of any unused portion of your homestead exemption.
- Kentucky allows a $2,500 exemption for a vehicle, including one spare tire, and federal law allows $3,775.
- Kentucky law allows an exemption for up to 75 percent of your earned, but unpaid weekly disposable earnings or 30 times the state or federal hourly wage, whichever is higher. The federal law regarding wages states that income you have earned but have not yet received will become a part of your bankruptcy estate.
- Under Kentucky bankruptcy laws, your pension or retirement are exempt. Under federal law, your pension or retirement are exempt, with a cap of $1.28 million on IRAs and Roth IRAs.
The homestead exemption in the state is considered fairly low—if your property is sold, you will be given only $5,000 to purchase a new residence. The federal homestead exemption is much better, leading many Kentucky residents to choose to follow federal exemptions. Kentucky exemptions also include:
- Up to $3,000 in tools, equipment, and livestock for farmers;
- Any professionally prescribed health aids;
- Spousal support (to the extent the support is reasonably necessary for your support and that of your dependents);
- Any award granted under victim’s reparation law;
- Any wrongful death award for an individual you were a dependent under;
- Any personal injury award up to $7,500 (not including pain and suffering), and
- Any award for loss of earnings to the extent the award is necessary for your support and that of your dependents.
Again, Kentucky bankruptcy exemptions are not as generous as federal exemptions. It is a good idea to discuss your situation fully with your Kentucky bankruptcy attorney to determine whether you should file with federal bankruptcy exemptions or Kentucky bankruptcy exemptions.
How Will a Chapter 7 Bankruptcy Affect Your Credit?
Although the issue of how a Chapter 7 bankruptcy filing will affect your credit is certainly a consideration, in reality, your credit has likely already been damaged by late payments—or the inability to make a payment at all. Although filing for bankruptcy will dramatically lower your credit score, you can begin to rebuild your credit through smart credit management, and after four-five years, you could potentially reach a credit score of 700-749. By adding secured credit cards or small installment loans and making payments in full each month, you can increase your credit score following a bankruptcy filing. Making on-time payments for all debt, both new and old, will also help increase your credit score following the bankruptcy. Overall, a Chapter 7 bankruptcy will remain on your credit report for up to ten years, although discharged debts will come off your credit report after seven years.
How Christopher Kurtz Law Office Can Help with Your Chapter 7 Bankruptcy Filing
At the Christopher Kurtz Law Office, we have been helping individuals just like you for decades. We have extensive knowledge of Kentucky and federal bankruptcy laws, making sure we keep up with any changes to those laws. We are passionate about helping you solve your financial troubles. We fully understand that hard-working, responsible adults can find themselves in financial trouble, whether due to the loss of a job, medical bills, student loans, or credit card debt. We believe in honesty and will never compromise the truth as we help you through the legal process of bankruptcy. Do not try to face this issue on your own—contact the Christopher Kurtz Law Office today.