Chapter 7 Bankruptcy

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.

On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The law became effective October 17, 2005. The BAPCPA instituted new rules and procedures for filing bankruptcy. The most significant change in the law relates to “Attorney Certification” as to the truthfulness of the information provided to the bankruptcy court and the “Means Test” requirements which require the attorney to perform a weighted test using state median income figures and local and national expense allowances as determined by the IRS. Attorney Certification and Means Test requirements have added substantial amounts of work, time, expense and responsibility to the bankruptcy attorney which have not previously been required.

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?”

Evaluating Bankruptcy

  • Car payment(s) behind
  • House payment(s) behind
  • Owe IRS
  • Repossession
  • Foreclosure
  • 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
  • Lawsuits
  • 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
An individual, partnership, or corporation may file a Chapter 7 bankruptcy. Legally married persons may file together (which is called a joint bankruptcy). Married persons can file individually, if they so desire.

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.

Yes. If you were granted a discharge in a previous Chapter 7 bankruptcy and the petition date for the previous Chapter 7 is within eight years, you will not be allowed to discharge in a new Chapter 7 case. If you filed a previous Chapter 7 and the proceeding was dismissed within 180 days, you may not be able to go forward with filing a Chapter 7 bankruptcy.
No. Rule 9001 of the Rules of Bankruptcy Procedures requires you or your attorney to certify that the bankruptcy is not filed for any improper purpose such as to harass or to cause unnecessary delay. A Chapter 7 bankruptcy is supposed to give you a fresh start, not a head start. You should not file a bankruptcy petition if the sole purpose is to delay a creditor’s actions.
You file for a Chapter 7 bankruptcy if:
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

The following debts are not discharged in a Chapter 7 bankruptcy proceeding:

  • 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
A bankruptcy will discharge the debt owed; however, it will not discharge the potential criminal liability for writing the bad check. We generally recommend that you make bad checks good in order to avoid criminal prosecution on the checks.
As a general rule, a bankruptcy will not remove a lien. If the lien is a non-judicial, non-possessory, non-purchase money security interest in household goods that are otherwise exempt, a lien avoidance may be filed with the court and the lien may be avoided. This is a very limited remedy. A bankruptcy will not eliminate a lien on a car or house or a lien on personal property that is subject to a purchase money security interest.
No. The discharge in bankruptcy will discharge only your liability on the debt and not the debt owed by the non-filing co-debtor. In most instances, the debt owed is owed on the basis of joint and several liability. Whatever was owed prior to filing remains owed by the non-filing co-debtor. This means that the non-filing co-debtor is responsible for 100% of the remaining debt.
In most cases you will not; however, the answer to this question depends on the extent to which non-exempt equity exists in the asset. Helping you determine this is where an experienced bankruptcy attorney can be most valuable.
The United States Supreme Court has held that pension plans, 401(k) plans, and other erisa-qualified plans are generally excluded from the bankruptcy estate under 11 U.S.C. section 541(c)(2). For nonerisa-qualified plans, you must look to the applicable exemption laws of your state.
There is a period of 180 days from the petition date where, if someone dies entitling you to money, the property reverts back to the petition date and the trustee will liquidate the inheritance proceeds to pay your creditors. It is important to note that you do not have to receive the money within the 180-day period after filing, the entitlement need only to occur within the 180-day period. The entitlement event is most commonly death. Thus, if someone dies within the 180-day period following the filing and that death ultimately entitles you to money (regardless of when you get the money), the money reverts back to the petition date and the trustee will administer it.
Yes. If you are on a bank account or deed or you co-own anything with someone else, it is an asset that you own and the Bankruptcy Court will take your interest to satisfy creditors. Most often, a parent or grandparent will put a son, daughter, grandson, or granddaughter on a checking account or on a deed to avoid probate. This may be a good arrangement for estate planning purposes, but for bankruptcy purposes, it represents a very real hazard that should be avoided at all costs.
Alimony, maintenance, and child support payments are generally not dischargeable. 11 U.S.C. section 523(a)(15) provides that certain other divorce-related obligations (such as payments to others, hold harmless agreements, and property settlement obligations) are not dischargeable if the debtor has the ability to pay them and the detriment to the spouse outweighs the benefit of the discharge to the debtor. In order to take advantage of 523(a)(15), the spouse must obtain an order from the bankruptcy court declaring the debt non-dischargeable.

Duration of Bankruptcy

The discharge order is normally entered immediately after the deadline to file a complaint objecting to discharge expires. The deadline to object to the dischargeability of a debt is set for approximately 14 weeks from the original petition date (the date the case was originally file stamped with the court). Therefore, the discharge order is normally entered with the court approximately 4 months from the petition date. In certain circumstances, the discharge can be delayed.
Normally, a discharge order is delayed because the debtor is not cooperating with either the trustee or a creditor. In these instances, the court enters an order extending the time of the entry of the discharge order.
In some limited circumstances, a discharge can be revoked. Also, in some limited circumstances, there is a continuing obligation to report the occurrence of certain events that extend beyond the discharge date.

The Process for Declaring Bankruptcy

No. You cannot give away your assets prior to filing. Doing so is a very serious matter. In all instances, the trustee will determine to whom you transferred property within one year of filing. Some trustees go back as far as five years. This is designed to prevent people from giving their property away before filing in order to prevent it from being liquidated by the trustee for payment to creditors. Transferring property to others prior to filing is a serious matter and should be avoided at all costs.
When you file for bankruptcy, the court will send an order to all the creditors listed in the creditors matrix filed with the court. This order forbids your creditors from taking any action to collect a debt. After retaining our office, we will provide you with a standard form letter on our letterhead that you should mail to your creditors. This letter notifies your creditors that you have an attorney representing you. Your creditor should then call us instead of you between the time you retain us and the time the bankruptcy documents are filed with the court. Once the documents are filed with the court, the court will notify your creditors directly.
Yes. However, some debts are not routinely part of a bankruptcy. These debts include utility bills, insurance bills, and other types of monthly recurring debt (for example, car insurance, house insurance, or karate lessons). As a general rule, all debts are scheduled on the bankruptcy schedules, including all credit card debts, medical bills, house loans, car loans, student loans, taxes, signature loans, credit union loans, and any other loans.
The discharge order in bankruptcy discharges only those debts that are included on the bankruptcy schedules. In addition, you must sign a document that is filed with the court stating all of your debts are listed. You should make every effort to ensure that you listed all of your debts. However, in some limited circumstances, it is not possible to know all of your creditors at the time of filing. In these instances, the Bankruptcy Court will allow you to amend your schedules to add debts that you owed prior to the filing but did not list. There are, however, time limits in which to do this. The time frame for amending your schedules is rather specific. Therefore, you should contact your attorney immediately upon discovering omitted creditors. Any delay in informing your attorney may prevent the addition of the creditor to the bankruptcy schedules and, therefore, may make the unlisted creditor’s debt exempt from discharge. It is very important to make sure all of your debts are listed the first time and, if not, to timely amend your schedules to add the unlisted creditors.
Yes. Assets are rights to property as well as property that you presently possess. For example, the right to insurance proceeds, tax refunds, or marital assets are assets even though you do not currently possess them. If you knowingly and fraudulently conceal any asset from the Bankruptcy Court, you have committed a felony and could be fined up to $5,000.00, imprisoned for up to five years, or both. The court can also deny your discharge, revoke your discharge, or dismiss or convert your bankruptcy proceeding. Failure to list assets is taken as a very serious matter by the Bankruptcy Court and trustees.
No. However, if you owe your employer money, then you are required to include your employer on the creditor schedule and your employer would, therefore, receive notice from the court.
As a general rule, you should not expect to continue to use credit cards after the petition is filed. In some narrow circumstances, the creditor may allow you to do so, but this depends on a number of factors including the balance owed as of the petition date and the types of purchases made on the card. We generally recommend that, after the filing, you obtain a collateralized credit card rather than expect to continue using a card that you listed as a debt on your bankruptcy schedules.
Not necessarily. In most cases, you never see a judge or enter a courtroom. In all cases, you are required to attend a 341 meeting, which is conducted by the trustee appointed to your case. This is an administrative proceeding and not a judicial proceeding. No judge is present. It is also not conducted in a courtroom. The hearing is normally conducted 30 to 40 days after filing the bankruptcy petition. This hearing is referred to as “the meeting of creditors.” At this meeting, the trustee will ask you questions that are intended to clarify and expand on the information contained in your bankruptcy schedules. Your answers to the trustee’s questions are made under oath and are tape recorded for later playback if necessary. It is absolutely critical that your answers be truthful. At the meeting, creditors are also given the opportunity to ask you questions under oath. The meeting normally lasts an hour or less. Your attorney is present at the meeting with you to assist you in the process.
In certain limited circumstances, the United States trustee’s office will allow a waiver of appearance upon request based on physical disability or unavailability due to geographical consideration due to employment. It is important to understand that a waiver of appearance is only allowed in very exceptional circumstances. Normally, this requires a doctor’s order or a letter from your employer and, even then, the request for waiver is routinely denied. You should expect to be required to appear at the 341 meeting of creditors.
The trustee will issue a show cause order to you requesting you to explain your non-appearance and will reschedule the meeting for another date. If you miss the second meeting, your case will be dismissed.
This is not possible. These creditors are required to be listed as debts in your bankruptcy schedules. These creditors will, therefore, receive notice from the Bankruptcy Court. It is important to recognize that bankruptcy does not prevent you from repaying any debt. Typical debts that debtors continue to repay after filing are house loans, car loans, dentists, doctors, and credit unions.
Yes, if you owe them money on the petition date. You are required to list all of your debts.
Yes; however, we recommend that, before filing for bankruptcy, you treat the loan as a distribution and recognize the tax consequences. The monthly loan repayment amount is not allowed by the Bankruptcy Court as an allowable expense.

Discrimination Due to Bankruptcy

No. 11 U.S.C. section 525 prohibits government units and private employers from discriminating against you because of a bankruptcy filing or because you failed to pay a non-dischargeable debt.
The federal, state, county, or municipal government may not discriminate against you with respect to the issuance of a license or permit because you filed bankruptcy. No employer, government or private, can lawfully terminate your employment or discriminate with respect to your employment as a result of filing bankruptcy. Utility companies cannot discontinue service or refuse to provide you services because of a bankruptcy. They can, however, require you to pay a reasonable deposit. This is normally construed as an amount twice the amount of your average monthly bill. You may not be discriminated against in obtaining future student loans on the grounds that you filed bankruptcy or failed to pay a student loan that is discharged in bankruptcy.

Rebuilding Credit After Bankruptcy

You will be able to apply for a car loan immediately after discharge, which is typically 14 weeks from the petition date.
You will be able to apply for a home loan two years from the petition date. This is the standard used in the industry.
For purposes of real estate, a bankruptcy will stay on your credit for up to 10 years.
No. Expect possibly to the extent that you default on an obligation to which both you and your non-filing spouse are obligated. In that case, it is nonpayment, not the bankruptcy filing, that would blemish the non-filing spouse’s credit.

Getting Started

Set an appointment to come into any of our three locations to meet with an attorney to discuss your debt-related problems. You will have the opportunity at that time to formally retain the attorney or you can wait and do so at a later date.
First, you should consult with an attorney. An attorney can help you plan for the bankruptcy and decide when to file a bankruptcy petition. Additionally,
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.

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