Chapter 7 Bankruptcy
A bankruptcy filing under Chapter 7 of the Bankruptcy Code is the most common type of bankruptcy filing and will discharge most debts of an eligible debtor. Also, debtors are generally allowed to keep most of their personal property because the property is exempt under the Bankruptcy Code.
GENERAL CONCEPTS
Discharge of Debts. The end goal of a Chapter 7 bankruptcy case is a discharge of most, if not all, of the debts of a debtor. This gives debtors a second chance and a new beginning. However, some debts generally cannot be discharged such as student loans, alimony, child support, criminal fines and most taxes.
Automatic Stay. Once the petition is filed, an automatic stay is immediately effective and creditors are not allowed to communicate with debtor. Creditors must stop all collection efforts and are not allowed to seize any property of the debtor. Therefore, any potential repossessions, attachments, foreclosures, utility shut-offs, property tax sales and evictions are put on hold.
Exempt Property. In most situations, the principle of exempt property will allow the debtor to keep their cars, sporting equipment, clothing, household goods, jewelery, retirement accounts, a good portion of the cash in the debtor’s checking and saving accounts and numerous other assets. Upon the filing of a Chapter 7 bankruptcy with the court, a court-appointed trustee will examine all the debtor’s assets and determine if any assets can be sold to pay any amounts owed to the creditors. However, the bankruptcy laws provide many exemptions for certain property so that such property cannot be liquidated. Instead, the property is deemed exempt from liquidation and the debtor is allowed to keep such property.
Presumption of Abuse. As you can imagine, the right to receive a discharge of all debts could be abused by individuals that do not really need it. Therefore, there are various tests or criteria that the bankruptcy laws require in order for a debtor to be granted a discharge. The tests are intended to filter out any debtors who have the ability to pay their creditors. The criteria generally centers around a determination of the income of the debtor. We can divide the basic idea of the analysis into two parts:
- MEDIAN FAMILY INCOME. The court will ask the question, “Does this individual have the reasonable means to pay what is legally owed by this debtor?” To make this determination the bankruptcy court will first decide if the debtor has an income below the “median family income” level. If the debtor, does have an income below the median family income then there will be no presumption of abuse. This is the best case scenario. However, if the debtor does have an income above the median family income, the court will apply a “means test.”
- MEANS TEST. The means test, in its simplest form, subtracts certain reasonable expenses from the current monthly income of the debtor. As long as the amount remaining after subtracting all the reasonable expenses is BELOW a certain amount, no presumption of abuse will arise. (Please note that the means test formula is much more complicated, but this should give a general idea of the concept and analysis.)
Reaffirmation of debt. In conjunction with a Chapter 7 bankruptcy filing, a debtor has the opportunity to reaffirm any debts which the debtor wants to remain obligated to pay. This legal concept is what allows a debtor to save their home. Most individuals who file for bankruptcy can afford to pay their mortgages if all the credit card debt is wiped away. Therefore, many debtors will choose to reaffirm their mortgages and continue to make payments after the bankruptcy is over. Many debtors also reaffirm their auto loans to keep their cars, and continue making payments on their auto loans after the bankruptcy is over.
TIMELINE
Pre-filing credit counseling within 180 days before filing. One result of the amendments to the Bankruptcy Code in 2005 is the requirement that a debtor receive counseling from an approved credit counseling agency within 180 days before a bankruptcy filing. The credit counseling agency must be approved by the United State Trustee Program for the jurisdiction that you are filing. The costs are $30 to $50.
File petition. After an initial consultation, we will review all relevant documents and then prepare a Chapter 7 bankruptcy petition to be filed on your behalf.
Meeting of Creditors or Section 341 Meeting. Approximately 30 days after your petition is filed, you will have a meeting with the trustee in charge of your filing. This meeting is called the meeting the creditors even though creditors do not generally show up. The meeting of creditors allows the trustee and other interested parties to ask questions about your financial situation. In most cases, this meeting only last 5 to 10 minutes.
Post-filing credit counseling. As soon as possible after the meeting of creditors, you must attend a post-filing course of personal financial management (similar to the pre-filing credit counseling). Within 45 days after the meeting of creditors, we must file a certification of completion of the course. Failure to make this filing may cause the court to dismiss your bankruptcy petition.
Discharge granted. Assuming that no complications or issues arise, about 60 days after the meeting of creditors you will be granted a notice of discharge and you will have your fresh start.