When most people think of filing for bankruptcy, they no doubt think of something akin to Chapter 7 liquidation. In Chapter 7, the debtor turns over all his non-exempt property to a bankruptcy trustee, who then liquidates the debtor's assets in order to pay back all or part of the outstanding debt. In Chapter 7, the debtor often receives a discharge, or cancellation, of some or all of his debt.
In 2005, several changes were made to the U.S. Bankruptcy Code that put significant restrictions on who could file for Chapter 7. Additionally, the Bankruptcy Code now imposes additional counseling requirements on Chapter 7 debtors.
Who Can File For Chapter 7?
Following the enactment of the Bankruptcy Abuse and Consumer Protection Act, a debtor who wishes to file for bankruptcy under Chapter 7 must undergo a "means test." The means test compares the debtor's income in the 6 months before the filing to their state's median income. If the debtor's income falls below the state median, they are automatically allowed to file for bankruptcy under Chapter 7. If the debtor's income is above their state's median income, they may still qualify to file for Chapter 7 under additional tests that take their expenses and excess income into account.
Additionally, in order to be eligible for Chapter 7, the applicant must have completed credit counseling by an approved credit counseling service.
Automatic Stays
When a debtor files for bankruptcy under Chapter 7, the Bankruptcy Court imposes an automatic stay on the bankruptcy estate. An automatic stay prevents creditors from attempting to foreclose or repossess any property or to collect on the debt without seeking the permission of the Bankruptcy Court. Additionally, an automatic stay prevents creditors from making collection phone calls or initiating any lawsuits against the debtor. The automatic stay remains in place until 1) the judge lifts the stay at the request of a creditor, 2) the debt is discharged, or 3) the property in question is no longer part of the bankruptcy estate.
Exempt Property
In a Chapter 7 bankruptcy, the debtor turns over all his non-exempt property to the bankruptcy trustee for liquidation, while keeping all of his exempt property. Though bankruptcy procedures take place in federal courts, property exemptions are controlled by state law and vary widely. However, the following items are usually exempt; that is, they are not required to be turned over to the bankruptcy trustee:
- All or part of the equity in the debtor's home (known as a "homestead exemption.");
- The cash value of life insurance policies;
- Individual retirement accounts (IRAs);
- Personal property: household items, clothes, furniture, books, musical instruments and jewelry worth less than $1,000;
- Older vehicles (with equity not exceeding a few thousand dollars);
- Public benefits;
- Tools used in the course of employment (usually worth more than a few thousand dollars).
Which Debt Gets Discharged?
One of the advantages of filing for bankruptcy is that the Bankruptcy Court may decide to discharge all or part of the debtor's outstanding financial obligations. While what debt is discharged is determined on a case-by-case basis, unsecured debt, such as credit cards that do not place a lien on any property, is frequently discharged by the Court. However, there are certain debts that the Bankruptcy Court will not discharge, such as:
- Back child support and current child support obligations;
- Alimony obligations;
- Tax debt;
- Student loans (unless the debtor can meet the difficult "undue burden" standard).
Denial of Discharge
There are grounds for which dischargeable debts will be denied. Some of the more common grounds for denial are as follows:
- Insufficient records of financials
- A failure to obey a bankruptcy court order
- Any attempt to deceive the bankruptcy court
- Any attempt to transfer or otherwise conceal property that would otherwise become part of the estate
Reaffirmation of Debt
In some situations, certain secured debts may be kept by the debtor by "reaffirming" the debt. Essentially, a reaffirmation is an agreement between the creditor and debtor, stating a new payment schedule that is within the budget of the debtor. Normally, this debt would be discharged and the property seized, but it can be kept so long as the debtor continues to make the agreed upon payments.
Paperwork and Process of Chapter 7
Typically, a Chapter 7 bankruptcy proceeds as follows:
Credit Counseling
In the 6 months prior to the bankruptcy filing, the debtor is required to undergo credit counseling. If the debtor does not receive credit counseling, his case will be dismissed.
Petition for Bankrupty
After the credit counseling has been completed, the debtor files a petition for bankruptcy with the U.S. Bankruptcy Court in their district. In addition, the debtor must turn over all property and financial information to the Court. At this point, the automatic stay goes into effect. The typical court cost of filing for bankruptcy is between $185 and $200.
A Trustee is Appointed
Within a few weeks after the petition is filed, the Court will appoint a bankruptcy trustee. The bankruptcy trustee will review the debtor's financial information and will set a date for the debtor to meet with his creditors.
341 Creditors Meeting
Anywhere from one to three months after the bankruptcy petition is filed, the 341 creditor's meeting takes place. This is typically a short meeting where the creditors have the chance to gain additional information about the debtor's finances and ability to repay his debt.
Confirm Chapter 7 Eligibility
Once the bankruptcy trustee has gathered and reviewed all the debtor's financial situation, the Court confirms whether the debtor is eligible to file for bankruptcy under Chapter 7.
Liquidation Process
If the Court confirms that the debtor is eligible to file under Chapter 7, the bankruptcy trustee begins liquidating the estate. The debtor turns over all non-exempt property, which the bankruptcy trustee uses to repay all or a portion of the outstanding debt.
Financial Management Course
Pursuant to the addition to the U.S. Bankruptcy Code, the debtor undergoes a financial management course.
Discharge: Case Closed
At a final hearing, the Court confirms that all requirements have been met, all non-exempt property liquidated, and all or a portion of the creditors repaid. The Court will then grant the debtor a discharge of the remaining debt. The case is then closed and the debtor is no longer liable to his creditors.
Getting Help Filing for Bankruptcy
While there is no requirement that a debtor hire an attorney in order to file for bankruptcy, certain areas of law are much more easily navigated with the assistance of an experienced and competent attorney. Bankruptcy is undoubtedly one such area. Attorneys will be able to guide a debtor through the myriad of requirements mandated by the U.S. Bankruptcy Code, as well as help a debtor determine what property is exempt from liquidation. A list of qualified bankruptcy attorneys in a debtor's area can usually be obtained from the local Office of the Clerk of U.S. Bankruptcy Court or from a local bar association.
