Chapter 7 Bankruptcy
A filing under Chapter 7 – often called a liquidation or straight bankruptcy – is the most common type of bankruptcy proceeding. In a Chapter 7 case, a debtor is allowed to exempt (keep) all or a certain portion of his or her property. In most cases, the debtor keeps all property. However, each person and situation is different, and the actual amount that can be retained (the "exempt" amount) by a specific debtor is determined by the market value of the debtor’s property in terms of dollars, the type of the property owned by the debtor (for example, a retirement account), and/or the manner in which the property is owned by the debtor (for example, whether the property is owned individually by the debtor or jointly by the debtor and a spouse).
Property that a debtor is entitled to keep is called "exempt property" and property that the debtor is not entitled to keep is considered "non-exempt property." A Chapter 7 Trustee is appointed by the bankruptcy court to collect the non-exempt property of the debtor, sell it, and distribute the sale proceeds to creditors. However, the vast majority of Chapter 7 bankruptcies are "no-asset" bankruptcies in which the debtor is permitted to keep all of his or her property and nothing is distributed to creditors.
The Chapter 7 Debtor’s Property
In the vast majority of the Chapter 7 cases, the debtor keeps all of his or her property. These kinds of cases (in which the debtor keeps all of his or her property) are called "no-asset" cases. Bankruptcy law is not meant to punish a person in financial trouble; it is intended to provide the honest debtor with a financial "fresh start."
In order to help a debtor get your fresh start and support their family, the federal government and all states allow debtors to keep certain property called "exempt" property. The amount and kind of "exemptions" (things you get to keep) available to debtors are generally determined by your state’s exemption laws. State and federal exemption laws are complex, and the particular exemptions available to debtors are most likely one of the most important issues in a bankruptcy case.
Although it is very possible that a debtor will be able to keep a house, car and remainder of the debtor’s other property in a Chapter 7 case, our firm strongly recommends that debtors consult experienced, knowledgeable legal counsel to determine the exemptions that will be available to them in their particular case.
After the Case is Filed
A Chapter 7 bankruptcy case is a proceeding "at equity" involving the debtor, the debtor’s property and the debtor’s creditors. If the debtor is an individual, he or she is entitled to represent him or herself or hire an attorney for representation. The interests of the creditors are represented by a Chapter 7 Trustee who administers any "non-exempt" property for the benefit of the debtor’s creditors. Although most debtors are able to keep all of their property (generally, creditors receive nothing in the typical Chapter 7 case), the Chapter 7 Trustee will review the debtor’s bankruptcy petition, schedules and documents to determine whether he or she has any non-exempt property that should be sold for the benefit of creditors.
Once filed, a Chapter 7 Bankruptcy case usually lasts approximately four to six months. During that time period, the debtor will be required to attend an administrative hearing conducted by your Chapter 7 Trustee where he or she will be required to answer questions about his or her assets and financial affairs. This hearing is called a "Meeting of Creditors" or "341 Meeting." Although all of creditors are invited to attend, it is unusual for creditors to attend, and more unusual for them to ask any questions at the hearing.
If you engage our firm to represent you in your bankruptcy case, one of our attorneys will explain what happens at that hearing, prepare you for your appearance and defend you at the hearing.
Eligibility to File Chapter 7
The single most important qualifying fact in determining eligibility for filing a Chapter 7 Bankruptcy is whether the client’s monthly income exceeds their monthly expenses. If so, the client may have too much "disposable income" to remain in Chapter 7. For most people seriously considering filing a Chapter 7 bankruptcy, eligibility is not a problem. However, the new Bankruptcy law that became effective on October 17, 2005, made significant changes governing an individual’s eligibility to file for Chapter 7 Bankruptcy relief.
The most important changes made to the Bankruptcy Code is the imposition of a "means test" to determine eligibility for Chapter 7, and a new requirement that a prospective debtor take an approved credit counseling course (from the list of credit counselors approved by the Office of the United States Trustee) and receive a credit counseling certificate prior to filing a bankruptcy case. This credit counseling course must have been completed within the 180 days preceding the date of the filing of the debtor’s bankruptcy and a certificate of credit counseling must be filed with the debtor’s initial bankruptcy filing. A list of approved credit counselors may be found at the Web site for the Office of the United States Trustee.
Additionally, certain income and expense limitations have been created by the new bankruptcy law in connection with eligibility for filing and continuing in a Chapter 7 case. Previous law allowed the bankruptcy court to review the debtor’s actual income and expenses to determine if they were reasonable, or on the other hand, constituted a substantial abuse of the bankruptcy process for which your case could be dismissed. This has changed. Under the new bankruptcy law, eligibility to file is not based on actual or real income and expenses.
The "means test" created by the new bankruptcy law disregards current actual income and expenses, and uses an average income received for the six months prior to filing and certain "allowable" expenses as defined by the Bankruptcy Code to determine whether a debtor is either eligible for Chapter 7, or on the other hand, has too much "disposable income," requiring them to be in another type of bankruptcy or not in a bankruptcy at all.
Types of Debt
Unsecured debts, such as credit card debt, personal loans, money judgments and most tax liabilities can be discharged (eliminated) in a Chapter 7. However, certain debts are not dischargeable under Chapter 7 Bankruptcy; these debts include, but are not limited to, student loans, certain recent or fraudulent tax liabilities, alimony, child or other court ordered support payments, debts arising out of fraud and other debts as specified in Section 523 of the Bankruptcy Code.
If a debt is secured by property, for example a home mortgage or car loan, then a debtor has certain options that he or she can elect concerning the payment or other treatment of the obligation. For example, in most cases the bankruptcy law allows debtors to:
- keep an automobile and continue to pay the loan (as long as the debtor is current and continues keep payments current);
- "redeem" the automobile from the car lender by paying the "fair market value" of the car; or
- return the vehicle to the lender in full satisfaction of the amount owed.
Under the new bankruptcy law, if a debtor wishes to retain a vehicle the debtor is also required to "reaffirm" the debt by agreeing to make future payments and remain liable for any future payment deficiency. Reaffirmation of a debt means that the debtor will continue to be personally liable for the debt even if the debtor receives a discharge of his or her other debts from the bankruptcy court. Our attorneys will discuss whether the debtor should "reaffirm" a debt, and any other available options, before our firm files a Chapter 7 case on his or her behalf. Although the choice is the debtor’s, proper representation is important to know the options and make the right choice. Our firm allows the debtor to make the decision, not the creditor.
Credit Reporting Issues
A Chapter 7 bankruptcy will stay in a client’s credit file (the internal file kept by credit reporting agencies) for up to 10 years from the day the client files the papers. Notwithstanding the foregoing, entry of the case on a client’s credit record will usually impact his or her credit score and ability to obtain credit for a much shorter period. A Chapter 7 discharge eliminates most or all of a client’s debt and so lowers their "debt-to-credit" ratio, which is a primary factor in determining credit scores. Usually, a good credit rating and the ability to obtain new credit cards, mortgages and car loans at reasonable interest rates returns within two years after obtaining a Chapter 7 discharge.
Need to speak with an attorney? Fill out our contact form and someone from our staff will contact you to schedule a time to discuss your situation and your legal options.