About Chapter 7 Bankruptcy
Chapter 7, the most common type of bankruptcy, is often referred to as “complete” or “straight” bankruptcy. Depending on your situation, filing a Chapter 7 may help you eliminate all of your debt without having any obligation to repay any of it back. Because all your debts may be eliminated, it is often referred to as a “fresh-start” bankruptcy.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcies are generally best if you don’t have a significant amount of assets, like substantial equity in your home or other investments. This is because a Bankruptcy Trustee may liquidate your property if it can’t be protected by your state’s bankruptcy exemptions. Liquidation occurs when the Trustee converts your assets to cash for distribution to your creditors. However, the vast majority of Chapter 7 cases are “no-asset” cases where no property is taken. It is important to consult with a local bankruptcy attorney to determine which of your assets are protected.
What are Ch 7 Bankruptcy Exemptions?
Both federal and state laws provide exemptions for property that you are allowed to claim as exempt and keep when you file a Chapter 7 bankruptcy. The types of property available for exemption status varies from state-to-state. What property are you allowed to keep in your state?
Your clothing, household goods, and personal effects are usually protected by your state or federal exemptions, and you do not typically lose these items when you file a Chapter 7 bankruptcy. You usually keep your house and car if you are current on your payments. The exemptions you use in your bankruptcy frequently protect the amount of equity you have in each asset.
Some states allow you to choose whether to use the federal exemptions or your state's exemptions. If federal exemptions allow you to keep more property than your state's exemptions, then you should opt for the federal exemptions if your state allows it.
The following states allow you to use the federal bankruptcy exemptions: Arkansas, Connecticut, Washington, D.C., Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Washington, and Wisconsin.
The following states do not allow you to use the federal bankruptcy exemptions: Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
Why Does Filing Chapter 7 Make Sense?
Stop Creditors in their Tracks!
Chapter 7 bankruptcy can provide immediate relief to a wide variety of financial problems. It is generally a very effective way to quickly eliminate large amounts of unsecured debts. Once you file a Chapter 7 bankruptcy, your creditors are immediately prohibited from engaging in any collection activity against you without first obtaining court permission from your Bankruptcy Judge. Some of the more common reasons to consider filing a Chapter 13 bankruptcy are:
- Your Wages are been Garnished
Most wage garnishments or wage assignments are immediately stopped upon filing bankruptcy. However, family law and child support-related deductions or litigation are not affected by filing a Chapter 7 bankruptcy.
- You Have a Large Amount of Unsecured Debts
Most credit cards, medical bills, broken leases, and other unsecured loans are eliminated in a Chapter 7 bankruptcy.
- Your Driver’s License is Suspended Due to an unpaid Judgment or Parking Tickets
If your driver’s license has been suspended due to an uninsured or underinsured accident, or for collection activity like parking tickets, filing a Chapter 7 bankruptcy can help get your license reinstated as long as no drugs or alcohol were involved.
- You have a limited income and are unable to repay your creditors
Since Chapter 7 bankruptcy does not require you to make payments, it is often suitable if you do not have a large amount of disposable income to repay your creditors.
- You Have Lost either a Home or Vehicle to Foreclosure or Repossession
A chapter 7 bankruptcy will typically eliminate the deficiency balance owed to your creditors after they have taken and resold your property.
- You Wish To Temporarily Stop a Foreclosure or Repossession
Upon filing a Chapter 7 bankruptcy, bankruptcy law immediately prohibits your creditors from continuing any collection activity, including attempting to repossess your car or foreclose on your house. However, a Chapter 7 bankruptcy only slows down a foreclosure or repossession, and a Chapter 13 bankruptcy is typically preferable if you are facing either situation.
- You Owe IRS or State Taxes
Filing bankruptcy bars the IRS and State Tax Agencies from any form of collection activity during your Chapter 7 bankruptcy. You may also be able to eliminate some of your tax debt by filing a Chapter 7 bankruptcy.
Once you file a Chapter 7 bankruptcy, your creditors are immediately prohibited from engaging in any collection activity against you without first obtaining court permission from your Bankruptcy Judge. Should you file a Chapter 7 bankruptcy because you have more debt than what you can repay?
You may be an ideal candidate for a Chapter 7 bankruptcy your debt exceeds more than you could ever imagine repaying. Chapter 7 can legally eliminate all of your unsecured debt -- credit cards, medical bills, and unsecured loans -- in just 4-6 months, giving you a fresh start and a manageable financial future. After filing bankruptcy, you can now use money that you previously sent to creditors each month to save for long-term goals like buying a new house or car, building a retirement fund, or creating a college fund.
The Disadvantage of Filing a Chapter 7 Bankruptcy
The main disadvantage of filing a Chapter 7 bankruptcy is that a record of the bankruptcy filing stays on your credit report for 10 years. Potential lenders are likely to view your credit report and see that you filed for a bankruptcy in the past. Depending on how good your credit was before filing bankruptcy, some credit may be less available to you and/or the terms of credit may be less favorable to you. However, most people find credit readily available immediately after receiving their bankruptcy discharge and are eligible for competitive home loans in as little as 24 months. A Chapter 7 bankruptcy may even improve your creditworthiness and more loans more readily available. See “Life After Bankrutpcy”
Chapter 7 Bankruptcy Rules: Do I Qualify?
Since the bankruptcy law change of October 17th, 2005, whether or not you qualify to file a Chapter 7 bankruptcy is now determined by your income and household size, among other factors. As a tool to help Bankruptcy Trustees and Judges, Congress implemented what is known as the "Means Test" to help determine whether someone is eligible for Chapter 7 bankruptcy relief.
The Means Test
The Means Test is a requirement in all Chapter 7 bankruptcy filings. Its purpose is to catch those people who have sufficient income to repay their debts and don’t truly need the relief granted in a Chapter 7 bankruptcy.
How the Means Test Works
The Means Test is based off of your state’s Median Income. If you and the other members of your household make less a year than your state’s median income for your household size, you will qualify to file Chapter 7 bankruptcy without having to pass the Means Test. If your household earns over your State’s Median Income for your household size, you must take and pass the Means Test to qualify to file Chapter 7 bankruptcy. If your household income is too high and you don’t pass the Means Test, you may be eligible to file a Chapter 13 bankruptcy.
To determine what your income is for the Means Test, your average gross income over the past 6 months prior to the filing of your case is calculated. This calculated income is often very different than what your present actual income is at the time you file your Chapter 7. Fixed costs like taxes, mortgage and car payments, health insurance, support payments and child care are subtracted from your gross income. Necessities like rent, utilities and transportation costs are set forth in your county’s IRS’s Collection Standards as fixed amounts and are deducted from your gross income as well. The amount that’s left over after those allowable expenses is your disposable income.
If your household is over your state’s median income, that monthly disposable income amount is then multiplied by sixty (60) to determine how much total disposable income you’ll have over the next five years. Potential filers will then fall into one of three groups:
- If the total of the monthly disposable income amount multiplied by sixty is less than $6,000, you passed the Means Test and you can file bankruptcy under Chapter 7 even though your household income is higher than your state’s median income.
- If the total is more than $10,000, there is a presumption of abuse in the eyes of the Bankruptcy Court, you most likely do not qualify for Chapter 7 Bankruptcy and you may be required to file Chapter 13 if you want to file bankruptcy.
- If your total disposable income for the five year period falls between $6,000 and $10,000, then another additional analysis applies. Here, your anticipated disposable income over the next 5 years — that calculated number between $6000 and $10,000 — is compared to the total of your non-priority unsecured debts. If your total disposable income amount is less than 25% of the total of those unsecured debts, the presumption of abuse does not arise and you may qualify to file Chapter 7.
As you can see, The Means Test is a highly scrutinized, complex, number driven examination of your income and expenses. It does take some practice to master. It is strongly advised that you consult with an experienced bankruptcy attorney to see how the means test affects you.
How Often Can I File for Chapter 7?
If you can satisfy the income requirements, it is your legal and economic right to file for Chapter 7 bankruptcy once every 8 years. In other words, you cannot file for a Chapter 7 bankruptcy more than once in an 8-year period, or receive two Chapter 7 discharges in an 8-year period. However, if you have filed for Chapter 7 bankruptcy in the last 8 years and believe you need additional bankruptcy relief, you may be eligible for a Chapter 13 bankruptcy.
What Types of Debts Will Not be Eliminated if I File a Chapter 7?
Not all debts are dischargeable when you file a Chapter 7. Discharge means the debts are forgiven in your bankruptcy and you no longer legally owe them and are not legally obligated to ever repay them. The most common types of debts that survive a Chapter 7 bankruptcy discharge are:
- Student Loan Debts
There was a time when student loan debt was dischargeable by filing a Chapter 7. Unfortunately, this is no longer the case and any form of student loans generally cannot be eliminated in a bankruptcy. There are a few rare exceptions to this rule, but you must be able to demonstrate extreme hardship.
- Some IRS or State Income Tax Debts
As a general rule, any tax debt must be 3 years old and be timely filed to be discharged. However, there may be additional factors that determine whether your tax debt is dischargeable in a Chapter 7. Dischargeablity of tax debt is a very complicated area of bankruptcy law and speaking to an experienced bankruptcy attorney is the best way to determine if your tax debt can be eliminated.
- Child Support or Alimony Obligations
Filing a Chapter 7 will not eliminate back child support or alimony obligations. It also won’t end future obligations to make these types of payments after filing.
- Government Fines
Debts such as parking tickets, speeding tickets and court fines are non-dischargeable in a Chapter 7 bankruptcy.
- Debts ordered to be paid by a Divorce Decree
A Chapter 7 bankruptcy does not eliminate debts that were ordered to be paid by in a Divorce Decree or a Family Court proceeding. This includes debts that the person’s former spouse incurred during their marriage.
If you have a significant amount of any of the above non-dischargeable debts, a Chapter 13 may be a better alternative for your individual situation. Let one of our experienced bankruptcy attorneys explain your options to you.
The 341 Meeting of the Creditors
Do I have to go to Court?
Yes, you are required to attend your 341 Meeting of the Creditors. It’s imperative that you attend this meeting, or your case may be dismissed. The proceeding normally takes place about 30 to 45 days after your bankruptcy petition has been filed with the court, and your bankruptcy attorney generally attends the meeting with you. The meeting is called a "341 Meeting" after the section in the Bankruptcy Code that requires it, U.S.C. 341.
Will my Creditors be at the 341 Meeting to Harass Me?
While its name implies otherwise, “The 341 Meeting of the Creditors,” creditors in fact very rarely appear at these meetings. In most cases there is no defense to your filing of bankruptcy and it would be a waste of time for your creditors to attend the meeting. Also, your creditors can make any objections to your bankruptcy even if they don’t choose to appear at the 341 meeting.
What happens at your 341 meeting?
The meeting is presided over by a bankruptcy trustee. The trustee’s job is to represent your creditors in the bankruptcy process and to help with the administration of your Chapter 7 case. The bankruptcy trustee asks you a series of questions to determine if you are eligible for a Chapter 7 bankruptcy and if you have any assets that are not protected by your bankruptcy exemptions.
Chapter 7 341 meetings generally take from 5 to 15 minutes, depending on the complexity of your case. The meetings are rather informal, but you do want to dress appropriately. Before the meeting, your bankruptcy attorney normally discusses any potential issues and helps you prepare for any questions that the trustee may ask.
Initially, you are required to take an oath to tell the truth under penalty of perjury. You are then asked to state your name, social security number, and address for the record. After you have verified your signatures on the filed bankruptcy petition, the Trustee asks you questions to verify the information provided on your bankruptcy schedules. Typically, the Trustee asks for details about any property you own, verifies your income and expenses, and inquires whether you are expecting an inheritance or other large sum of money in the near future.
The Role of the Chapter 7 Trustee
The primary role of a Chapter 7 Trustee is to handle the administration of your case and represent the interests of your creditors. The Trustee looks for potential unprotected assets that may be liquidated and distributed as repayment to your creditors. Because state exemptions protect the vast majority of most Chapter 7 filers’ assets, the majority of cases have no assets to liquidate and the Trustee’s main job is ensuring the bankruptcy laws are followed by all parties.
If your Trustee does find a non-exempt asset, he may choose to liquidate the nonexempt property in a manner that maximizes repayment distribution to your creditors. The Trustee accomplishes this by selling your unprotected property to the highest bidder. If the property is not free and clear of liens at the time of distribution (such as a mortgage on a house), the lien holders are paid from the proceeds of the sale before distribution to the other creditors is made.
The Trustee may also attempt to recover cash or property under the Trustee's "avoiding powers." The Trustee's avoiding powers are composed of three broad powers:
- The power to set aside any preferential transfers that you may have made to creditors within 90 days before the filing of your Chapter 7.
- The power to undo any security interests that you may not have properly perfected under non-bankruptcy law at the time of filing;
- The power to pursue any state law non-bankruptcy claims on your behalf (such as personal injury claims), that were pending at the time of filing.
The Trustee represents the interests of your creditors in a Chapter 7 bankruptcy and can often take an adversarial role in your case. It is strongly recommended that you hire a bankruptcy attorney who can review your chapter 7 bankruptcy forms, represent your interests and help you through the Chapter 7 bankruptcy process.