Chapter 7 Bankruptcy

Chapter 7 Bankruptcy Alternatives

If you have a business and want to continue operating the business, you may want to consider a Chapter 11 bankruptcy. In a Chapter 11 bankruptcy you can adjust your debts, either by reducing the total amount of debt owed or by extending your payment period. You also may be able to get a more thorough restructuring of your business (if needed).

Or, if you are considering bankruptcy as an individual and you have regular income, you may want to file under Chapter 13 of the Bankruptcy Code. This can give you a chance to save your home (and other secured assets) from foreclosure by allowing you to catch up on past due payments through a payment plan. Chapter 13 can often provide you the breathing room you need to get on top of your payments again.

Chapter 7 Bankruptcy Advantages

There are a couple of advantages of filing a Chapter 7 bankruptcy over the other chapters.

No repayment plan

A Chapter 7 bankruptcy doesn’t have any lengthy repayment plan. In a Chapter 7 bankruptcy, the bankruptcy trustee sells all of your nonexempt assets and uses the money raised to pay your creditors pursuant to the guidelines specified in the Bankruptcy Code. This is called a Chapter 7 discharge. Also, if you have property secured by a lien (called secured debt), the Chapter 7 bankruptcy discharge does not discharge the lien.

Walk away from debt

Chapter 7 bankruptcy is called liquidation in the bankruptcy code, but is often called a “walk away” by consumers because that’s what you do, you walk away from your debts. Most of your debts will be discharged, which means that you will not have to pay them back. It’s a fresh start.

But of course there’s always a catch, and here it is that most of your belongings (your assets in legal terms) will be liquidated (i.e., sold) to pay off as much of your debt as is possible. There are some things you’re allowed to keep, these are called exempt assets.

Chapter 7 Eligibility

Anyone, an individual, a partnership, corporation, or other business type can file for debt relief under Chapter 7 of the Bankruptcy Code.

New Bankruptcy Law

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) there has been a lot of confusion as to whether or not a person is able to file a Chapter 7 bankruptcy. BAPCPA now requires a means test to determine whether an individual consumer debtor qualifies for relief under Chapter 7 bankruptcy. If your income exceeds certain thresholds, you may not be eligible for Chapter 7 relief. If you are eligible, you usually get a discharge within 4-6 months of the filing of your case.  Visit our Bankruptcyt Means Test page to see if you’re eligible or contact the bankruptcy attorneys at Sparber Rudolph Annen.

BAPCPA also places limits on how often you can be granted debt relief under a Chapter 7 bankruptcy. You can now only be granted a Chapter 7 bankruptcy debt discharge once every eight years. The purpose of these limits is to prevent what’s known as “serial filers,” people who file for bankruptcy protection over and over, abusing the system instead of honestly trying to pay back their debts.

In addition to BAPCPA rules and limitations, if most of your debts are unsecured consumer debt (like credit cards) the court can dismiss your Chapter 7 case if it believes that giving you debt relief would be an abuse of the Chapter 7 bankruptcy rules. Visit our New Bankruptcy Law Overview page for more information on BAPCPA.

The Chapter 7 Bankruptcy Process

Your Chapter 7 bankruptcy case begins when your Sparber Rudolph Annen bankruptcy attorney files a bankruptcy petition with the bankruptcy court. The petition must include:

• • A list of assets and liabilities
• • A list of current income and expenses
• • A statement of your financial affairs, and
• • A list of any unperformed contracts or any current leases
• • Copies of your latest tax return

If your debt is primarily consumer debt (credit cards), you also must file:

• • A certificate of completion from a government approved consumer credit counseling service
  
  
• • Pay stubs from the last 60 days, if you have any
  
  
• • An outline of your monthly income and any expected raises or increase in expenses after filing

Bankruptcy Fees

The courts are required to charge a $245 filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge. You will usually pay these fees to the court clerk when the bankruptcy petition is filed. Sometimes the court will allow you to pay these fees in installments, which will be limited to four. Normally you will have to make all four installment payments with 120 days of filing the petition, but the court can allow you up to 180 days at its discretion.

If you are filing a joint petition with your spouse, you only have to pay one set of fees. If you do not pay your fees, your bankruptcy petition can be dismissed. However, if your income is less than 150% of the poverty level and you can’t pay the fee even in installments, the court can waive the fee requirement.

Bankruptcy Forms

Your attorney will need to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules. The bankruptcy lawyers at Sparber Rudolph Annen can do this for you.  You will need the following information for this:

• • A list of all your creditors and the amount you owe each
• • The source, amount, and frequency of your income
• • A list of all of all your property
• • A detailed list of your monthly living expenses
• • A list of all your exempt property

If you’re married, you’ll also need to get the information for your spouse, even if your spouse is not filing bankruptcy along with you. The bankruptcy court wants this information to assess the financial condition of the household.

Bankruptcy Exemptions

Every state has a list of exempt assets. Some states’ bankruptcy exemptions are more liberal than others making them more Chapter 7 friendly. The homestead exemption (the amount of your home’s value that is considered untouchable) is one good example of these differences. Some states, specifically Florida, Texas, Iowa, Kansas and South Dakota provide for an unlimited dollar amount of value for their homestead exemption. Whereas other states, (Delaware, New Jersey, Maryland, and Pennsylvania) don’t allow any homestead exemption at all. Check out California’s Bankruptcy Exemptions.

There are also Federal Bankruptcy Exemptions. Each state is allowed to decide if its citizens can use the Federal Bankruptcy Exemptions or must use their respective state’s.

California Bankruptcy Exemptions

In California, you are not allowed to use the Federal Bankruptcy Exemptions. California has two bankruptcy exemption tables and allows you to choose which of these you are going to use. Or you can use the Federal Non-bankruptcy Exemptions. The object is to pick the one which leaves you better off financially.

You must have resided in a state for at least two years in order to use that state’s bankruptcy exemptions. If you have been at your current location less than two years you will have to use the exemptions available in your previous state of residence.

Unlike a Chapter 13 bankruptcy, any wages you earn after your have filed for Chapter 7 bankruptcy are yours to keep. Your creditors will not be able to claim any part of those earnings.

The Automatic Stay

Once you file a petition for a Chapter 7 bankruptcy, there is an automatic stay issued to your creditors. The stay begins automatically, without the court having to do anything. The bankruptcy clerk will notify all the creditors you listed in your bankruptcy forms.

During the automatic stay, all judgments, collection activities, foreclosures, and repossessions of property must be suspended and cannot be continued by your creditors for any debt or claim that arose prior to the filing of your bankruptcy petition. This automatic stay provides a breathing spell for you and a time for negotiations to try to resolve your financial difficulties.

There are certain circumstances for which the automatic stay does not apply. Among these are family-court related actions, such as petitions for divorce, collections of past due support obligations, or civil actions concerning domestic violence.

In other circumstances a creditor can request that the bankruptcy court remove the automatic stay. Your bankruptcy attorney can provide you with the specific details of these and other exceptions and tell you whether or not they apply to you.

Contact the bankruptcy attorneys at Sparber Rudolph Annen for more information on stay relief and the automatic stay.

The Section 341 Meeting

Between 20 and 40 days after you file for bankruptcy, the bankruptcy trustee will hold a meeting of creditors. This is called the 341 Meeting, named after the section of the bankruptcy code that requires this meeting. You are required to attend this meeting. Your creditors may attend this meeting. They are not required to attend.

During this meeting you will be sworn in and then the trustee and/or your creditors can ask you questions. The bankruptcy trustee’s role is to ensure that you understand that you are filing bankruptcy and what doing so means, such as its affects on your credit history, the effect of receiving a discharge, the ability to file another bankruptcy under a different chapter and the effect of reaffirming a debt.

You may be nervous or embarrassed at having to face your creditors. But don’t worry. A Sparber Rudolph Annen bankruptcy attorney will attend the meeting with you to look out for your best interests. And besides, most creditors don’t usually attend these meeting anyway.

Within 10 days after the 341 Meeting, the U.S. Trustee will report to the Bankruptcy Court whether the case should be presumed to be bankruptcy abuse under the means test instituted under the new Bankruptcy Code.

The Bankruptcy Trustee

When you file for debt relief under Chapter 7 bankruptcy, the U.S. Trustee will appoint an impartial bankruptcy case trustee to oversee the case and liquidate your nonexempt assets. If all your assets are exempt or have valid liens on them, the case trustee will file a "no asset" report with the court, which means there will be no pay out to unsecured creditors.

In an asset case the bankruptcy trustee liquidates your nonexempt assets in a way to get the most money to return to your unsecured creditors. The trustee does this by selling your property if it is free of any liens (and not exempt) or if it is worth more than the amount remaining on the liens.

Additionally, the bankruptcy trustee is given avoiding powers which enable the trustee to recover certain preferential or fraudulent transfers of property or to void liens created right before the beginning of your bankruptcy case.

In addition, if you are filing as a business, the bankruptcy court may authorize the trustee to run the business for a while, if doing so will benefit your creditors and enhance the liquidation of the estate.

Proofs of Claim

Most Chapter 7 bankruptcy cases involving individuals are no asset cases. But if the case looks like it is going to be an asset case from the beginning, your unsecured creditors must file a proof of claim with the Bankruptcy Court within 90 days after the date set for the 341 meeting.

Usually in a no asset Chapter 7 case, the creditors do not need to file a proof of claim because there is not going to be any recovery anyway. But if the trustee later recovers assets for liquidation, the Bankruptcy Court will provide notice to your creditors and will allow additional time for them to file proofs of claim.

The Bankruptcy Estate

Commencement of a bankruptcy case creates a "bankruptcy estate." The estate technically becomes the temporary legal owner of all the debtor's property. It consists of all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. Generally speaking, the debtor's creditors are paid from nonexempt property of the estate.

Section 726 of the Bankruptcy Code governs the distribution of the property of the estate. Under § 726, there are six classes of claims; and each class must be paid in full before the next lower class is paid anything. The debtor is only paid if all other classes of claims have been paid in full.

Accordingly, the debtor is not particularly interested in the trustee's disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case. The individual debtor's primary concerns in a chapter 7 case are to retain exempt property and to receive a discharge that covers as many debts as possible.

The Debt Discharge

A Chapter 7 Bankruptcy Discharge releases you from liability for most of your debts and prevents your creditors from taking any collection actions on a discharged debt.

Not all of your debts will be discharged. These include

• • Alimony and child support debt
  
  
• • Certain tax debt
  
  
• • Student loan debt
  
  
• • Debts for delierately injuring another or another’s property.
  
  
• • Debts for death or personal injury caused by your committing a DUI.
  
  
• • Certain criminal restitution order debts.

You will continue to be liable for these debts to the extent that they are not paid in the Chapter 7 case.

Because the Chapter 7 discharge is subject to so many exceptions, you should call Sparber Rudolph Annen’s bankruptcy attorneys. They can discuss with you the scope of the discharge.

More than 99% of Chapter 7 bankruptcy cases result in a full debt discharge. The Bankruptcy Court will usually issue a discharge order early in the case, around 60 to 90 days after the date first set for the 341 Meeting unless a party in interest files an objection to the discharge or a motion to extend the time to object.

Debt Discharge Denial

The grounds for denying you a discharge in a Chapter 7 bankruptcy case are very narrowly construed. The bankruptcy court may deny you a discharge if it finds that you:

• • Did not keep or produce adequate books or financial records
  
  

• • Did not explain the loss of assets
  
  
• • Committed a bankruptcy crime such as perjury
  
  
• • Did not obey an order of the bankruptcy court
  
  
• • Fraudulently transferred, concealed, or destroyed property that would have been property of the bankruptcy estate
  
  
• • Did not complete an approved financial management instructional course.

Debt Reaffirmation

Secured creditors retain some rights to seize property securing an underlying debt even after discharge. Depending on your circumstances, you may wish to keep certain secured property that is not exempt (e.g., an automobile). In this case, you may decide to reaffirm the debt.

A debt reaffirmation is an agreement between you and your creditor that you will remain liable for the debt and pay all or a portion of the amount owed, even though the debt would otherwise be discharged in your bankruptcy. In return, the creditor promises that it will not take back the property as long as you continue to make your payments.

If you decide to reaffirm a debt, you must do so before the discharge is entered. You must sign a written reaffirmation agreement and file it with the court. The Bankruptcy Code requires that these agreements contain a long list of disclosures. Among these are:

• • The agreement must advise you of the amount of the debt being reaffirmed
  
  
• • That reaffirmation means your personal liability for that debt will not be discharged in your bankruptcy.

The disclosures also require a signed and filed statement of your current income and expenses which shows that you have enough income to pay the reaffirmed debt. If you do not have enough income to pay the reaffirmed debt, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement.