About Chapter 7 Bankruptcy
According to a recent Federal Reserve study, almost half of Americans cannot make a $400 emergency payment. In other words, most families basically live hand-to-mouth and have essentially no financial resources to weather the financial storms of life. These storms include things like a temporary layoff, serious illness, divorce, and a family emergency. Typically, these storms trigger a snowball effect. With little or nothing to fall back on, many families shift scarce resources to secured debts, like home mortgage payments and utility bills, and neglect other kinds of debt, like medical bills and credit cards. Most moneylenders have very little patience is this area. Harassing phone calls and other low-level adverse action usually start with the first missed or late payment; lawsuits and other higher-level adverse action follows shortly thereafter. Many times, Chapter 7 bankruptcy is the only way to reverse this downward spiral.
Why File a Chapter 7 Bankruptcy?
As soon as the voluntary petition is filed, an automatic stay goes into effect, in most cases. Typically, that automatic stay remains in effect until the judge signs the discharge order at the end of the case. During this period, moneylenders cannot take any adverse action against you without special permission from the bankruptcy judge. Such action includes:
In fact, during bankruptcy Chapter 7, the Bankruptcy Code prohibits moneylenders from communicating with debtors while their cases are active. Out of an abundance of caution, some moneylenders even stop sending statements or automatically debiting bank accounts.
The automatic stay is part of the fresh financial start that the law guarantees, because it allows you to better organize your finances without undue pressure from moneylenders. The real fresh start comes with the discharge order, which is discussed below.
Protected Assets in a Bankruptcy Chapter 7
Although this kind of bankruptcy is sometimes called “liquidation,” that word is rather misleading, because you get to keep almost all your property in a bankruptcy Chapter 7. Depending on whether you use federal or state exemptions, you’ll get to keep your:
- Motor vehicle,
- Retirement account, and
- Most personal property.
Some of these exemptions, like the retirement account exemption, is unlimited, so as long as the account meets qualifications, the entire amount is protected. But in most cases, a value cap applies. The Bankruptcy Code requires debtors to declare the asset’s as-is cash value, or the “garage sale value.” This value is often much lower than the fair market value, so an experienced bankruptcy lawyer can maximize your exemptions.
Dischargeable Debts in a Chapter 7 Bankruptcy
Credit cards, medical bills, payday loans, and other unsecured debts are all dischargeable in bankruptcy Chapter 7 cases. Secured debts, like home mortgages and car loans, are dischargeable as well. However, although bankruptcy Chapter 7 discharges the debt, it does not extinguish the lien, so secured moneylenders can begin adverse actions to recover such property after the case is discharged if payments aren’t current.
In a few cases, special rules apply. Some examples include:
- Student Loans: Education debt is dischargeable if the borrower suffers from an “undue hardship,” a phrase that has a specific meaning in specific factual situations.
- Tax Debt: Income taxes are generally dischargeable if the debt is at least three years old, the returns have been on file for at least two years, and the debt has not been assessed in the last 240 days.
Once again, bankruptcy Chapter 7 discharges the debt but does not eliminate collateral consequences, like a school’s ability to withhold transcripts for nonpayment of student loans or a taxing authority’s income tax lien.
Some debts are nondischargeable by law, including child support and other domestic support obligations (DSOs), debts that involve fraud or dishonesty, most criminal law penalties, and alcohol-related personal injury verdicts.
Bankruptcy Chapter 7 Pre-Filing Procedure
Most debtors qualify for liquidation bankruptcy. Prior to filing a bankruptcy Chapter 7, all debtors must complete an approved debt counselling course. Most people take this class online, as it only takes a few minutes and only costs a few dollars.
The means test is the bigger pre-qualification. Essentially, to be eligible for bankruptcy Chapter 7, the debtor must have an income less than or equal to the average income for families of that size in that state or metropolitan area. The exact amount changes several times a year, but as of the end of 2016, the cut-off in Oregon was a $79,000 annual income for a family of four.
Filing the Voluntary Petition
Persons who received a previous bankruptcy Chapter 7 discharge must wait eight years before they can file another Chapter 7. Most people who received a previous Chapter 13 bankruptcy discharge must wait six years before they can file a Chapter 7.
The initial petition and schedules contains an exhaustive list of the debtor’s assets and liabilities, as well as an income/expense breakdown and certain other financial information. In emergency situations, all courts accept a “barebones” filing that is only a few pages long. It’s important to review these papers carefully before filing. This is because although most courts are relatively forgiving when it comes to honest mistakes, intentional fraud is another story entirely. Typically, any fraud renders the debt non-dischargeable and exposes the filing party to potential criminal liability.
341 Creditors’ Meeting in a Chapter 7 Bankruptcy
The “creditors’ meeting” is another misleading term. The moneylenders almost never appear at this informal gathering, even though they receive notice. In nearly all cases, the only persons present are:
- your attorney
- the trustee (person who oversees the bankruptcy on behalf of the judge)
This helps ensure privacy and keep confidentiality.
In a Chapter 13, the trustee takes an active role by essentially putting the debtors on an allowance and supervising the debt consolidation payments. But in a bankruptcy Chapter 7, the trustee basically only verifies your identity. He or she also discusses any “red flags” or other irregularities with the attorney. You will need to bring to the meeting or provide in advance:
- recent tax returns
- your drivers’ license
- your Social Security card
Once the meeting starts, the trustee asks a few questions regarding your identity and the accuracy of the paperwork you filed, and that is pretty much it.
In most cases, the judge signs a bankruptcy Chapter 7 discharge order about three or four months after the 341 meeting. Prior to that, you will need to take an additional debtor education class; sometimes the trustee offers live classes at no cost, and sometimes you can take the class online.
Rebuilding credit is a priority at this point, and your attorney will have specific ideas for your situation. The easiest way to maximize your fresh start is to stay current on student loan payments and secured debts. This is because moneylenders report this information directly to the credit bureaus. A credit card is a good way to build positive payment history as well. It’s best to start with one that has a low credit line. Once again, on-time payments drive a credit score up each and every month.
The bankruptcy itself usually falls off most credit reports in seven or ten years. During that time, be upfront with potential lenders. Tell them right away that you have a bankruptcy on your credit record. If they will work with you, that’s great. If they won’t work with you, there are plenty of other lenders who will.