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When other methods of debt relief have failed, some people turn to bankruptcy to get a fresh financial start. While there are several different types of bankruptcy that are available to individuals, the two most common are Chapter 7 and Chapter 13. In this article, we will address these common issues:
In this article we’ll take an in-depth look at Chapter 7 bankruptcy. In Chapter 7, sometimes referred to as a liquidation bankruptcy, the court will seize your non-exempt property and assets to pay off your creditors. However, bankruptcy is not designed to leave a person with nothing to survive on. If so, there would be no incentive for anyone to declare bankruptcy. Thus, certain property is allowed to be exempt (or excluded) from the bankruptcy court.
Deciding whether to file for bankruptcy can be a daunting and complicated task. Declaring bankruptcy is never something that someone should take lightly or casually. It’s always best to explore all your options before asking the courts for bankruptcy relief. Should you determine that filing for bankruptcy is in your best interest, you will need to decide which chapter of the Bankruptcy Code to file under.
Before filing for bankruptcy, consider contacting your creditors to see if they’ll be willing to work with you to create a repayment plan. Many creditors will agree to this when faced with the possibility that the only other alternative for the debtor is to declare bankruptcy. It is also in the interest of creditors to work with debtors directly whenever possible since they’ll have more control over repayment rather than having the court decide.
If you have nothing of significant value, and no excess assets in your name, you can always default on a debt entirely. A creditor can attempt to collect on the debt you owe, which usually takes the form of phone calls or letters in the mail stating that your account is in collection. You are always within your rights to ignore these letters and phone calls. Creditors can sue you to collect on the debt, but likely won’t unless you have non-exempt property and assets worth taking. While creditors may accept your default as a business loss, it will significantly impact your credit score and may remain on your credit record for up to seven years.
Once you make the decision to file for bankruptcy relief, you’ll need to decide on which chapter of the bankruptcy code to file under. Chapters 7, 11, 12, and 13 are available to individual debtors. Chapters 7 and 11 are available to corporations, partnerships, and LLCs. There is a Chapter 9 bankruptcy, but this is only available to cities and municipalities. Businesses typically file for bankruptcy under Chapter 11, which allows them to restructure their debt and create a plan for future profitability. Individuals overwhelmingly file for bankruptcy under Chapters 7 or 13. Only a fraction of individuals file for bankruptcy relief under Chapter 11.
Chapter 12 bankruptcy is only available to family farmers and fishermen. Individuals with too high an income or too much debt, may only qualify or choose to file for Chapter 13 bankruptcy instead of Chapter 7. Unlike Chapter 7, which liquidates your non-exempt assets to repay your creditors, Chapter 13 creates a repayment plan for you to pay your creditors back over the course of three to five years. Bankruptcy law is extremely complex and you should speak with a bankruptcy lawyer to find an option that best addresses your situation.
You must meet certain eligibility criteria to qualify for chapter 7 bankruptcy. This type of bankruptcy is available to individuals, partnerships, corporations, and limited liability companies (LLCs) as long as the other requirements are met. However, only individuals may have their debts discharged under chapter 7 bankruptcy. For corporations, partnerships, and LLCs, the purpose of a chapter 7 is to close the business and liquidate assets in order to pay off its creditors. In general, a business will only be in chapter 7 if their bankruptcy filing for chapter 11 was dismissed or converted by creditor(s) request.
The individual consumer must also meet income requirements, pass a means test, and complete mandatory credit counseling prior to filing for chapter 7 bankruptcy. If your income is too high, but unable to pass the means test, you may still qualify for chapter 7.
Since Chapter 7 bankruptcy expunges all eligible debts, the person filing for Chapter 7 must meet certain income requirements. Debtors who earn less than the median income in their state will generally qualify to file a Chapter 7 bankruptcy. A list of the median incomes based on family size in all states is maintained by the U.S. Department of Justice. Qualification is determined by taking the debtor's average income over the previous six months and comparing it to state income figures for families of the same size. Average monthly income is calculated based on the following:
There are some instances in which a filer who has an income over the allowable amount might still qualify for Chapter 7. This is determined by completing and passing the means test. This test is meant to stop people from claiming protections under Chapter 7 when they have the ability to repay creditors. Debtors who make too much and fail the means test will likely need to file for bankruptcy under Chapter 13.
The means test takes certain monthly expenses and compares those expenses to the income of the filer. The test is designed to determine how much disposable income debtors have left after paying their expenses. Even those earning significant incomes may be able to pass it if they do not have enough money left over each month after covering their bills.
Most of the expenses used for performing the means test are based on national or local standards rather than the debtor's actual costs. This prevents the bankruptcy system from being abused by debtors who spend extravagant amounts. Documents reflecting the true amounts paid by debtors may be submitted for the following expenses:
Bankruptcy courts may allow other expenses to be considered in special circumstances. Also, disabled veterans who incurred the debts included in their Chapter 7 petitions while on active duty or performing homeland security assignments are exempt from the means test.
An individual debtor seeking chapter 7 bankruptcy relief is required to undergo mandatory credit counseling from an approved agency within 180 days of filing for bankruptcy. This requirement may be waived for debtors who have mostly business debt rather than consumer debt, such as credit card debt.
Chapter 7 credit counseling seeks to find feasible ways for debtors to meet their financial obligations without filing for bankruptcy or taking on more debt. The U.S. Department of Justice provides a list of nonprofit credit counseling agencies that have been approved to provide this service.
Credit counseling sessions generally include a summary of the debtor's income and expenses and a review of the options available. Once concluded, a certificate of completion is issued to the debtor. This certificate must be filed with the court no later than 15 days after the official bankruptcy petition has been filed.
The paperwork involved in filing a Chapter 7 bankruptcy case includes the official bankruptcy petition asking the court for debt relief. Other required forms must document your income, assets, debts, and expenses. Below, we’ve included a step-by-step guide to filing for Chapter 7 bankruptcy.
Step 1: Gather information necessary to fill out the bankruptcy filing forms and schedules, including:
Step 2: Individuals file the official petition in the federal bankruptcy court serving the area where they live. Business debtors file the petition in the federal bankruptcy court serving the area where their principal place of business is located. All official petition forms can be found on the United States Courts website. At the same time, the debtors must file these documents with the court:
Step 3: You must pay the filing fees with the court clerk. Fees include (accurate as of April 1, 2018):
Step 4: You must provide the bankruptcy trustee with:
The first thing that happens once the bankruptcy court receives your petition is putting a halt on collections. This is what is referred to as an “automatic stay” against your creditors. With some exceptions, the automatic stay stops most creditors from attempting to collect debts from you while the bankruptcy proceedings are going on. The court will send notices about the automatic stay to all creditors listed within a petition, so your creditors will be aware that they cannot collect debts from you during this time.
The stay presents creditors with a legal order to stop telephone calls, letters, wage garnishments or lawsuits. Depending on the details of a case, a court might exempt certain creditors from a stay or limit its time period. If a creditor or debt collector has any questions about a debt or its status, that party must generally contact the debtor's attorney or other representative.
A bankruptcy estate is created by the court once it has received your petition for debt relief. The estate forms an entity composed of assets and debts separate from the debtor. The court then assigns a trustee to manage the debtor's estate. The trustee has a duty to act impartially. Actions taken by the trustee include identifying all the debtor's property and determining the validity of claims from creditors. When a case requires the selling of non-exempt assets, the trustee oversees the sales and pays creditors with the proceeds.
Before anything is sold, the trustee will determine if all or part of the debtor's assets are exempt. The review will also determine if any parties hold liens upon any assets. If all assets are exempt, which occurs frequently in Chapter 7 cases, the trustee will issue a no-asset report to the court. This means that no unsecured creditors will receive money. Any creditors holding secured debts need to inform the court of their claims within 90 days after the court schedules a meeting of creditors.
Approximately a month after you file for bankruptcy, the trustee assigned to your case will convene a meeting of creditors. You and the trustee are both required to attend. Attendance by your creditors is optional. At that meeting, you may have to answer questions about your financial situation from both the trustee and/or your creditors. The trustee will examine the information presented by the debtor to gain a full understanding of the situation. A trustee will also want to know if the debtor understands the consequences of the bankruptcy. At this meeting, the trustee will approve the case, dismiss it or ask for more information. The main role of your trustee is to ensure that you comply with all rules and requests for information and to liquidate any assets that you have that are not exempt. Any assets that are available to liquidate will be distributed to your creditors in accordance with the bankruptcy laws.
Despite its fearsome moniker as a “liquidation bankruptcy,” Chapter 7 allows the debtor to keep any property that is exempt from bankruptcy proceedings. Only non-exempt property can be sold by the trustee and used to repay creditors. What property is and is not exempt from the bankruptcy estate is dependent on both federal and state bankruptcy law. Although bankruptcy is governed by federal law, states may craft their own property exemption laws. Some states allow the debtor to choose whether to follow state law or federal law. Determining specifically which of the debtor’s possessions may be considered exempt property is conducted on a case-by-case basis.
In general, items considered necessary for modern life are typically exempt. This protects the property you’ll need to survive, while forcing you to turn over excess, unnecessary assets. Many of the things that are usually exempt include:
Many of these categories come with limits and are subject to oversight from the court and the trustee. For instance, necessary clothing can be kept, but frivolous clothing may have to be sold off. Vehicles, homes, and wages may be kept only in portion, or up to a specific value. For example, someone who is declaring bankruptcy may not be allowed to keep a foreign sports car worth $500,000, but may be able to keep a daily driver sedan that is worth $30,000.
At the end of this process is the bankruptcy discharge. A discharge absolves the debtor of most of their debts and prevents creditors from taking further action against the debtor for those debts. Excluding cases which were dismissed or converted, individual consumers who filed for Chapter 7 were granted a discharge in more than 99% of cases. The discharge is only available to individual debtor seeking Chapter 7 bankruptcy relief. Any Chapter 7 filed by a partnership, corporation, or LLC will result in the business closing and its assets sold off to repay creditors.
Keep in mind that a Chapter 7 bankruptcy discharge may not completely wipe the slate clean. There are some debts which are not dischargeable via bankruptcy. These debts include, but are not limited to:
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified chapter 7 bankruptcy lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local chapter 7 bankruptcy attorney to discuss your specific legal situation.