Also known as “liquidation,” Chapter 7 bankruptcy is the type of bankruptcy where the debtor is essentially declaring that they are unable to pay their debts with future earnings. The debtor is seeking a discharge of all their dischargeable debt and in exchange, the trustee has the power to take the debtor’s non-exempt property and liquidate it (sell it). The trustee would then use the proceeds to pay the creditors. In practice, however, very few cases result in the trustee taking assets, as the debtors can exempt all of their assets.
Chapter 7 Bankruptcy Defined
The major intent of bankruptcy reform is to require people, who can afford to make some payments towards their debt, to make these payments, while still affording them the right to have the rest of their debt erased. These people MUST file Chapter 13.
Chapter 7 bankruptcy is most often referred to as a “fresh start bankruptcy.” In a Chapter 7 bankruptcy, you discharge all of your debts (with some exceptions) and get a fresh start. In exchange for the promise of a fresh start, the Bankruptcy Court requires you to disclose on your bankruptcy schedules all of your debts and all of your assets. A trustee of the court is appointed to administer your bankruptcy case. The trustee reviews the documents to see if any scheduled assets are subject to liquidation for purposes of repaying creditors. In most cases, sufficient exemptions exist to exempt most, if not all, of the scheduled assets. Therefore, in most cases, there are no assets to administer and the bankruptcy is treated as a no-asset case. You do not lose anything and you receive a discharge of your debts. However, if the trustee discovers assets that are not exempt, the trustee will liquidate those assets and make a distribution to creditors.
In most cases the new requirements do not result in the denial of access to bankruptcy protection but getting from Point A to Point B is more time consuming and requires more work by the attorney. The intended result of the BAPCPA is to slow down the bankruptcy filings by making them more expensive and time consuming.
Another notable change in the BAPCPA is the requirement that a Debtor obtain both pre-filing and pre-discharge credit counseling from an approved credit counseling agency in order to file and obtain a Discharge in bankruptcy.
If you are reading this, chances are you are about to meet the attorney for a bankruptcy consultation. To assist the attorney, please have the following information ready and available at your meeting:
1 – Last two (2) years income tax returns (if married, both husband and wife)
2 – Current paycheck stubs (if married, both husband and wife)
3 – List of creditors with amounts owed
4 – All paperwork relating to lawsuits, if applicable
5 – List of assets (both real estate and personal) with values
6 – List of specific questions you may wish to ask the attorney
The initial appointment is offered at no cost to you. New client appointments are scheduled every half hour, therefore, it is very important that you have the required information and that your questions be organized. The intent of this appointment is to familiarize yourself with the attorney and the process, have the attorney address your primary questions and concerns, and to allow the attorney to determine what, if any, legal issues exist which need to be addressed relating to eligibility for bankruptcy protection or protecting certain assets in bankruptcy.
No specific fees or payment arrangements will be discussed at your initial consultation. A number of issues effect the fees charged and payment arrangements offered and it is impractical for the attorney to complete a fee analysis in the time allotted for your initial appointment. You will receive a WRITTEN PROPOSAL for representation within 48 hours of meeting the attorney. For more specific information on fees, please read “How Do I Pay the Attorney?”
- Car payment(s) behind
- House payment(s) behind
- Owe IRS
- Can’t afford to pay living expenses with debts
- Charging living expenses each month because all money is going to credit card payments
- Garnishments of wages or bank accounts
- Tax Levy
- Credit Cards current but getting further behind on living expenses
- Behind on real estate taxes
- No provision in budget for real estate taxes, insurance, tags, or other non-monthly expenses
- Unrealistically low figures in budget for living expenses such as $100 for food
You must pass the first stage of the means test. A person filing Chapter 7 bankruptcy will have to take an approved Credit Counseling Course before he or she files. Your bankruptcy lawyer can set this up for you. In some cases the course can be taken over the Internet.
An approved Financial Management Course will have to be completed before you can be discharged. Your bankruptcy lawyer can set this up for you.
You must also pass the second stage of the means test. If your income is slightly over the state’s median income you may still be able to file Chapter 7. Your bankruptcy lawyer will be able to make this calculation and also advise on allowable expenses you can use in the calculation.
you have no disposable income with which to feasibly re-organize (that is, you have nothing left at the end of the month after paying ordinary expenses such as rent, utilities, food, and insurance)
you are not going to lose any property that is important to you
you will receive a discharge on substantially all of your debts
you do not expect to have recurring unpaid or un-reimbursed bills in the future
you are current on your secured debts
you have not been in a previous Chapter 7 within eight years
your debts are primarily consumer debts, medical debts, signature loans, or auto or house deficiencies
you want a fresh start rather than the ability to more favorably repay your debts
Results of Bankruptcy
- debts not listed on the creditor list filed with the court
- certain taxes
- a claim based on money, property, services, or credit obtained by fraud or false pretenses. This involves a situation where there were misrepresentations made to the creditor that were false and/or fraudulent such that the creditor can legitimately argue that the extension of credit would not have been made had the creditor been told the truth. This includes misrepresentation of income, marital status, home ownership status, and other forms of fraud and false pretense.
- consumer debt of more then $1,000.00 for luxury goods or services to a single creditor incurred within 60 days of the petition date
- cash advances of more than $1,000.00 under an open-end credit plan made within 60 days of the bankruptcy filing
- damages for willful or malicious injury
- alimony, child support, and certain other court-ordered marital debts
- any debt for death or personal injury caused by the unlawful operation of a motor vehicle while intoxicated. This includes motorcycles, boats, 4-wheelers, and other types of motor vehicles in addition to automobiles.
- certain governmental penalties
- educational loans
Duration of Bankruptcy
The Process for Declaring Bankruptcy
Discrimination Due to Bankruptcy
Rebuilding Credit After Bankruptcy
You should stop using your credit cards. If you borrow money with the specific intent of discharging the debt in bankruptcy rather than repaying it, the debt is not dischargeable. For example, certain luxury purchases over $1,000 made within 60 days of the bankruptcy filing are not dischargeable. Cash advances aggregating $1,000 made within 60 days of the bankruptcy filing are not dischargeable. Debts involving materially false financial statements are not dischargeable.
You should not transfer your assets to friends, family, or business associates to protect the assets from your creditors. The transfer may be considered a fraudulent conveyance. If it is, you may lose both the property and your right to a bankruptcy discharge.
You should not destroy any business or financial records. If you do, you can lose your right to a bankruptcy discharge.
You should carefully choose the creditors you do pay. Some creditors (for example, landlords, secured creditors, and some utilities) should be paid under most circumstances. Conversely, if you pay a credit card debt that will eventually be discharged, you may be throwing money away. Your attorney will advise you on which creditors to pay.