Bankruptcy- Chapter 7
Each year, hundreds of thousands of Americans decide that Chapter 7 bankruptcy is the debt-relief option for them. Chapter 7 bankruptcy was designed to eliminate many unsecured debts like credit cards, medical bills, payday loans and some personal loans.
Federal bankruptcy law was created specifically to help people in situations where they cannot afford to pay their debts back. There is nothing unethical or immoral about using federally established law to legally eliminate your debts. In fact it shows good character, that you are willing to take action to resolve your financial situation.
The term Chapter 7 Bankruptcy comes from the federal statute that contains this particular section of the bankruptcy code. Lawyers often call this form of bankruptcy "straight bankruptcy" because it cancels out most, if not all, of your debts. Most bankruptcies filed by consumers are Chapter 7's and Chapter 7's represent over 90% of our practice. Chapter 7 is usually appropriate when the monthly payment on all your personal overhead (rent/car payment/utilities/groceries) exceeds or nearly exceeds your take home pay.
The primary purpose of filing a Chapter 7 bankruptcy is to discharge certain debts, allowing an honest individual debtor a "fresh start." A bankruptcy discharge has the effect of extinguishing a debtor's personal liability on dischargeable debts. Although the filing of an individual Chapter 7 petition usually results in a discharge of debts, an individual's right to a discharge is not absolute, and some types of debts are not discharged, i.e most student loans, taxes, child/spousal support. Moreover, a bankruptcy discharge does not extinguish liens on property (although it may be possible to avoid them).
A Chapter 7 Bankruptcy generally takes from 4 to 6 months to complete. In short, a bankruptcy petition is prepared and filed with the court. An examination of the debtor is scheduled approximately 45 days thereafter. If everything's done right, the examination will take less then 90 seconds in most cases (or our cases anyway). After the examination, the debtor is generally entittled to his/her discharge 60 days later.
In addition to the foregoing, debtors must do two other things. First, before a case is filed each debtor must consult with an apporved credit counselor. Currently, we can direct you to a website where you can do this consultation over the internet for free. Second, all debtors must take an approved debt education course within 45 days of their examination. That course takes approximately two hours and currently costs between $15.00 and $75.00 depending on whether it's done over the internet, by phone or in person.
Filing bankruptcy will put into effect an "automatic stay." The automatic stay immediately stops your creditors from trying to collect what you owe them. So, at least temporarily, creditors will not be able to go after your car, bank accounts, house, other property or garnish your wages (except child/spousal support). Further, the automatic stay will stop most legal proceedings that may be running against you.
Until your bankruptcy case ends, your financial problems will be in the hands of the trustee of the bankruptcy court. The court assumes legal control of the property you own and the debts that you owe as of the date you file. For most debtors, this is of no effect. But nothing can be sold without the court's consent (i.e. short sale). You have control, with a few exceptions, of property or income that you acquire after you file for bankruptcy.
A bankruptcy court operates through an appointed person called a "bankruptcy trustee." The trustee goes through the papers that we file with the court and conducts the above referenced examination at was is called a "341a Meeting of Creditors." While creditors can attend this meeting, they rarely do.
Most people that file Chapter 7 keep everything they own. However, there are limits to what you can keep. In the rare circumstance you're over-the-limit, you may have to turn over some of your property to the bankruptcy trustee, who will then sell it and pay a dividend to your creditors. You can surrender the property to the trustee, pay the trustee its fair market value, or, if the trustee agrees, swap exempt property for nonexempt property. Very few people actually lose property in the bankruptcy.
If you have pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and motor vehicles. In most cases, you will have the choice to surrender the collateral and wipe out the debt or make payment arrangements to keep the collateral.
At the end of the bankruptcy process, most of your debts are wiped out by the court. You no longer legally owe your creditors. You wont be able to file for Chapter 7 bankruptcy again for 8 years, but you may still find relief under Chapter 13 if you find yourself in significant debt beforehand.
Under the "new" (2005) bankruptcy law, people who file for Chapter 7 bankruptcy must pass what is known as the "Chapter 7 means test":
About The Bankruptcy Means Test
The Chapter 7 means test is a formula applied to determine whether or not the consumer should have enough money available to make some minimal payment to creditors in a Chapter 13 bankruptcy plan. In most cases, those who want to file Chapter 7, can.The court's goal is to reserve Chapter 7 for those who have no means to repay their debts. Talk to a bankruptcy lawyer about your eligibility to file bankruptcy under Chapter 7 or 13.
The Means Test is a Two Step Process
- Median Income Comparison
Check to see if the monthly average of your last 6 months gross income is below the median income for your state. If it is you can file Chapter 7.
Click here to read table for State Median IncomesIn California, the median income of a sinlge-earner is $48,009. Two-person is $62,970. Three-person is $68,670. Four-person is $78,869.
If your income is higher than the median income, it doesn't necessarily mean that you can't file for Chapter 7 bankruptcy; it just triggers the second step in the test.
- Calculating Disposable Income and Unsecured Debts
For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called "disposable income"), after paying your "allowed" monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy
You are only able to receive a discharge after eight (8) years have passed since the commencement of the last case in which you received a discharge, although you can file another Chapter 13 case sooner (usually 4 years). Thus, you should not file a bankruptcy if you need the option of doing it again in the next eight years.
If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 petition. Only under extraordinary circumstances will the Trustee operate a business.
Payments made to or on behalf of any relatives within twelve (12) months prior to filing your bankruptcy case are recoverable by the Trustee in your case. That's right. If you repaid money during that period to your brother, or made payments on a credit card that your mother let you use, they will have to pay back that money to your Trustee who will then distribute it equally to all your creditors. This is one of the biggest mistakes people make, often innocently because they don't know they will be filing a bankruptcy, but that's the law. It's designed to prevent debtors from preferring one creditor over another. The same is true for non-relatives, although the lookback period for them (such as credit cards, etc.) is only ninety (90) days and most people don't really care if their Trustee sues the credit card company to recover the money.
The bankruptcy will appear on your credit report for up to ten (10) years after you file. Other accurate negative reports on your credit must be removed after seven (7) years (like late payments on credit cards, foreclosures, etc). However, according to my former clients, this is usually not as big a problem as most people think. Credit lending agencies know you won't be able to file another bankruptcy for at least 6 years, and therefore, they don't have that risk to bear. You will not get as high a credit limit as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn't be that difficult and you can rebuild your credit over time. What you will likely face is higher interest rates, required higher down payments, more points, etc. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc. In any event, I can provide you with excellent materials for helping you rebuild your credit should you so desire.
Any debt aggregating more than $550.00 from any single creditor for non-essential,"luxury" goods, or cash advances totaling over $825.00 on a credit card, incurred or taken within 90 days prior to filing the bankruptcy, are presumed to be nondischargeable. The obvious reason for this is to discourage would-be debtors from "running up" their credit charges, then filing bankruptcy. To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it's best not to use them at all). It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy. You should consult with your attorney about your personal situation. This particular provision is just a presumption of nondischargeability. It does not mean that if you wait more than 90 days you are magically free from nondischargeability issues; nor does it mean that if you file the bankruptcy within the 90 days that you won't be able to discharge that debt. What it basically does is shift the burden of proving that the debt should or shouldn't be discharged onto the debtor during that 90 day period (rather than on the creditor where it would otherwise be).
This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.