If you need to file bankruptcy, Chapter 7 is the ideal way to do it, providing you qualify to use the procedure.
What Is Chapter 7 Bankruptcy?
A bankruptcy under Chapter 7 of the Bankruptcy Code is a procedure whereby a person in severe financial straits can have some or all of his or her debts eliminated.
How Does Bankruptcy Work?
The Chapter 7 bankruptcy process typically takes from four to six months to complete. For the person filing, it involves filling out and filing some forms, attending a meeting with the creditors and a court-appointed bankruptcy trustee, and getting most or all of the debts discharged. There are filing fees of $335. If you have difficulty paying, you may ask the court for assistance by filing certain forms. If you hire a lawyer, you can expect to pay in the range of $800 to $3,000, depending upon where you live and the complexity of your case.
How to File Chapter 7 Bankruptcy
There are limitations to filing Chapter 7 bankruptcy. You may not file if you obtained a discharge in a Chapter 7 case within the past eight years, or in a Chapter 13 case within the past six years. You may not file if a previous bankruptcy case (Chapter 7 or 13) was dismissed within the past 180 days because you violated a court order, you were determined to have engaged in fraudulent conduct, or you requested dismissal after a creditor requested relief from the automatic stay.
You will first need to determine your average monthly income during the six months before filing. If it is at or under the median income for your state (allowing for the size of your family), you are allowed to file under Chapter 7. However, if you are above the median income, you need to move on to a second step of calculation, known as the means test.
The means test uses a standard form to compare your income to your debts, and determine if you have sufficient disposable income to at least pay part of your unsecured debts over a five-year period. If you have such disposable income, you will need to file for a Chapter 13 bankruptcy. [Exception: You are not required to satisfy the means test if (1) you are a disabled veteran and incurred your debts while on active duty, or (2) your debts are mainly from operating a business.]
Classifying Your Debts
In bankruptcy, debts are divided into two classes: secured debts and unsecured debts. A secured debt is one where you have pledged certain property as security for payment, such as with a mortgage or auto loan. An unsecured debt is not connected with any particular property, such as credit card debt and medical bills.
Debts are also divided into dischargeable debts (which are eliminated by bankruptcy) and nondischargeable debts (which are still owed after bankruptcy). Most consumer debts are dischargeable. Nondischargeable debts are most taxes, child support, and student loans.
What Happens to Your Property
In bankruptcy, property is divided into two classes: exempt property and nonexempt property. Exempt property is property that either state or federal law has declared to be unavailable to creditors in trying to collect debt. The purpose of bankruptcy exemptions is to protect certain basic types of property so that you are not left totally destitute after bankruptcy. These are assets you may keep to help you get a fresh start financially. All other property is considered nonexempt, and may be sold by the bankruptcy trustee to at least partially repay your creditors. The exact exemptions vary from state to state. (See Which Exemptions Can You Use In Bankruptcy? )
As a practical matter, in most Chapter 7 bankruptcies, nonexempt property is of minimal value. If the trustee determines that nonexempt property is of little value, or that it would be problematic to sell it, the trustee will abandon the property and you will keep it.
However, even if an item of property is exempt, if it is connected to a secured debt and you don’t keep up your payments, the creditor may take the property securing the loan (through foreclosure or repossession). Therefore, in order to keep property that is security for a debt, you will need to either keep up your payments or negotiate a new payment plan with the creditor. Also, if your equity in the property exceeds the amount the law allows for an exemption, the trustee may require sale of the property.
Before filing for bankruptcy you must complete a credit counseling program with a court-approved agency. This should be done no more than six months before you file, and can often be done online. There is a fee for the program, but the fee may be reduced or waived if you meet certain low income requirements. To find an approved agency in your state, visit the Credit Counseling and Debtor Education page on the U.S. Department of Justice website.
Your particular situation may influence the timing of filing for bankruptcy. While it is often an advantage to file as soon as possible (to stop a foreclosure or eviction, for example), there are various circumstances where it may be better to delay filing bankruptcy.
The federal bankruptcy courts have created numerous official forms. The basic form that must be prepared to file for Chapter 7 bankruptcy is the Voluntary Petition. Along with the Voluntary Petition, you will need to prepare numerous other forms, which outline your property, debts, income and expenses. It is important to list all creditors and their accurate mailing addresses. Any debts not listed will not be discharged. You will also indicate what property you claim to be exempt, and whether you have sold or given away any property with the previous two years.
You will need to indicate how you plan to deal with your secured debts. Your choices are:
- Keep up your existing payments.
- Redeem the property, which means pay the creditor the replacement value of the property.
- Reaffirm the debt, which means reach a new payment arrangement with the creditor.
- Surrender the property, which means allow the creditor to take the property.
Filing with the Bankruptcy Court
Your forms will be filed with the bankruptcy court clerk. The typical practice is to file all of the forms at the same time; however, in an emergency (such as needing to immediately stop a foreclosure, eviction, or car repossession) it is permissible to file just the two-page Voluntary Petition, and file the other forms within fourteen days. Once you file the Voluntary Petition, you have turned over control of your property and debts to the court. You may not transfer any property or pay any debts without the approval of the court.
The automatic stay. One of the most important effects of filing your Voluntary Petition is that this activates what is called the automatic stay. The automatic stay prevents your creditors from taking any action to try to collect. It stops foreclosure, eviction, utility shut-offs, repossession, wage garnishment, bank account attachments and lawsuits as well as collection phone calls, letters, emails and texts. However, a creditor may ask the court to lift the stay so that a foreclosure, eviction, repossession or other lawsuit may proceed.
Attending the Meeting of Creditors
The Trustee. A bankruptcy trustee is a person appointed by the court to take control of your property and assure that your creditors are paid as much as possible. The trustee’s pay is directly related to how much he or she gets for the creditors. The trustee will examine the forms you file with the court to be sure they are complete, try to identify nonexempt property, and look to see if you’ve improperly transferred any property.
Within about two weeks of filing, you should receive a notice of a creditors meeting. You need to go to this meeting, which will be run by the bankruptcy trustee. You will be sworn in, and may be asked questions about your paperwork and your financial situation. Creditors may also ask you questions, but in a vast majority of cases, creditors do not even show up for the meeting.
After the creditors meeting, creditors and the trustee have 60 days in which to object to a discharge, or to the discharge of any particular debt. To do so, they need to file a lawsuit in the bankruptcy court. If there is no such lawsuit filed within the 60-day period, the court will issue an order discharging your unsecured debts.
After filing, but before discharge, you must also complete a debtor education course offered by a court-approved provider. This can often be done online and will take several hours to complete. There is a fee for the program, but the fee may be reduced or waived if you are below certain income levels. You will need to file a certificate verifying completion of the class.
Once the discharge order is issued, you no longer owe your dischargeable, unsecured debts. Your creditors no longer have any legal right to seek payment. You will need to keep up payments for reaffirmed debts, and will still be obligated for nondischargeable debts (such as child support, most taxes, student loans and debts continuing because they were determined by the court to have been incurred through fraud).
If your financial situation is dire enough for you to qualify, a Chapter 7 bankruptcy is usually your best choice. This will relieve you or most or all of your debt and allow you to get a fresh start.
Find out if you quality for Chapter 7 bankruptcy with a free bankruptcy evaluation of your situation by a participating law firm.