In a world where credit helps fill the gap between your earnings and your needs, it is easy to fall into the debt trap, and once you do, it can be difficult to get out of it again. When that happens, many people consider Chapter 7 bankruptcy, an option that provides a liquidation of your nonexempt property. The proceeds of the sale of property is distributed to creditors.
Chapter 7 is not the ideal option for debtors who are in business, such as sole proprietorships, partnerships or corporations. A better option for business people would be to file their petition under Chapter 11 of the Bankruptcy Code, which enables adjustment of debts. Chapter 11 bankruptcy seeks options that enable a reduction of debt, or extension of the repayment period. In some cases, it seeks a comprehensive reorganization of the debt. Alternatively, Chapter 13 of the Bankruptcy Code provides sole proprietors with relief.
As an individual debtor with a regular income has the option to seek adjustment of debts under Bankruptcy Code Chapter 13. This option provides individuals a payment plan which gives them an opportunity to catch up on past due payments and prevent losing their homes through foreclosure.
A Chapter 7 case may be dismissed if the individual has consumer debts, rather than business debts, especially if the court finds that providing relief would abuse section 707 (b) of Chapter 7.
In the event that the debtor's current monthly income is higher than the state median, a means test has to be completed to determine whether filing for Chapter 7 bankruptcy would be presumptively abusive. The court presumes abuse if the individual's aggregate current monthly income over the last five years, less certain expenses that are statutorily allowed, exceeds:
- 25% of his or her nonpriority unsecured debt (provided the amount is $7,700 or more.
A presumption of abuse may only be rebutted by special circumstances which justify the additional expenses or adjustments of the current monthly income. If the debtor is unable to overcome the presumption of abuse, the case will either be dismissed or converted to chapter 13, with the consent of the debtor.
Another option for debtors who want to avoid a bankruptcy filing, would be debt counseling services or out-of-court agreements with the creditors.
About Chapter 7 Bankruptcy
Unlike Chapter 13, Chapter 7 does not involve filing repayment plans. Rather, a bankruptcy trustee gathers all the debtor's non-exempt assets. These assets are sold and the proceeds of the sale of such assets are used to pay creditors (or holders of claims) according to the provisions set out by the Bankruptcy Code.
Property is often subject to mortgages and liens, which pledge such property to other creditors. Additionally, the debtor will be able to keep some exempt property. However, the remaining assets will be liquidated by the trustee. It is important for debtors who wish to file a petition for relief under Chapter 7, that they may lose some property.
Am I Eligible for a Chapter 7 Bankruptcy Filing?
In order to quality for Chapter 7 relief under the Bankruptcy Code, you must be:
- An individual,
- A partnership,
- A corporation,
- Or other business entity.
Chapter 7 relief is available irrespective of the debtor's level of solvency or insolvency, and irrespective of the amount of debt. However, an individual may not file under Chapter 7 if a prior bankruptcy petition had been dismissed within the last 180 days because:
- The debtor willfully failed to appear in court or to comply with court orders;
- The debtor voluntarily dismissed the case in response to creditors seeking relief from the courts to recover property on which they hold mortgages and liens.
An individual may only apply for relief under Chapter 7 after receiving individual or group credit counseling from an approved agency in the 180 days leading up to filing for bankruptcy. In emergency situations, or in case where the U.S. Trustees or bankruptcy administrators have deemed that there is a lack of approved agencies that can provide the required counseling, exceptions may apply. Debt management plans that are developed during the required credit counseling period must be filed in court.
The objective of a filing for bankruptcy is to provide honest debtors a fresh start by discharging certain debts. A debtor is not liable for any discharged debts. Only individual debtors are eligible for a discharge in a Chapter 7 bankruptcy case. Discharges are not available to corporations or partnerships.
Individual Chapter 7 cases usually result in discharging of debts, but that is not necessarily absolute. Some types of debt may not be discharged. Likewise, a lien on a debtor's property may not be extinguished by a bankruptcy discharge.
Chapter 7: Understanding the process
A Chapter 7 bankruptcy case is set in motion when the debtor files a petition with the local bankruptcy court. The forms may be obtained from legal stationery stores or may be downloaded from the US Courts website. A debtor has to provide the following along with their Official Bankruptcy Forms:
- The debtor's income, including amount, frequency, and source;
- A list of living expenses, required by the debtor, including food, shelter, clothing, transportation, taxes, utilities, medication, and other necessities;
- A list of the debtor's property;
- A list of all the creditors and their claims.
Married people must provide this information needed by their spouse, whether or not it is a joint petition or separate petitions. In the event that only one spouse files, the court still requires the non-filing spouse's income and expenses so that the financial situation of the household can be evaluated.
For an individual, the court would be nearest to his or her residence, and in the case of a business, it would be closest to the area where the business debtor has its principal assets or place of business.
Along with the petition, the debtor has to file the following items with the court:
- A schedule of assets and liabilities
- A current schedule of income and expenses
- A statement of financial affairs
- A schedule of unexpired leases and executory assets
Additionally, the debtor must also provide the trustee who was assigned to the case with a copy of tax returns of a transcript for the last tax year, and any tax returns that were filed during the case, as well as any returns that had not been filed for previous years.
An individual debtor who has mostly consumer debts must file additional documents, including:
- A certificate of recent credit counseling;
- A copy of the debt repayment plan from credit counseling;
- A statement of net income (including anticipated increases in income or expenses);
- Evidence of payment received from employers;
- A record of interest in any state or federal tuition or qualification accounts;
- Identity Documents.
Spouses may file individual or joint petitions for Chapter 7 bankruptcy, but the same filing requirements apply.
The costs for filing a Chapter 7 bankruptcy are as follows:
- Case filing fee - $245
- Miscellaneous administration fee - $75
- Trustee surcharge - $15.
Most often, the fees are payable to the court clerk for filing. However, with the permission of the court, an individual debtor may pay this fee in four installments, with the last payment due 120 days after filing. The court may extend this time to 180 days.
Joint petitions will involve only one each of the filing fee, trustee surcharge and admin fee.
If the debtor fails to pay the fees, the case will likely be dismissed.
In cases where the debtor's income is below 150% of the Bankruptcy Court's definition of the poverty level, and the debtor is deemed unable to pay installments, the fees may be waived.
The individual debtor will also file a schedule of exempt property, which the Bankruptcy Code grants to individual debtors in order to protect their property from creditors' claims. These items may be exempt under the laws of the debtor's home state or under the federal bankruptcy law. The Bankruptcy Code permits states to adopt their own law regarding exemptions, instead of using federal exemptions. Other jurisdictions allow the debtor to choose between federal or state exemptions, which means that the chosen law determines exemptions.
In most cases, filing a Chapter 7 petition should stop collection actions against the debtor and his or her property. However, certain types of actions may not be stopped, or it may only be effective for a limited period of time. A stay of collection does not require any judicial action as it arises through the operation of the law. Most often, creditors may not initiate or pursue lawsuits while the stay is effective and they typically may not call you to demand payments, or institute wage garnishments once the bankruptcy clerk notifies them of the bankruptcy case.
The trustee assigned to the case will schedule a meeting with all the creditors within twenty-one ot forty days after filing the petition. The bankruptcy administrator or US trustee will typically arrange the meeting, which will not be held in a place where there is no regular US trustee or where there is no bankruptcy administrator staffing. However, the meeting must be held within 60 days of the order of relief.
During the meeting of the creditors, the debtor will be placed under oath, and the creditors as well as the trustee are allowed to ask questions of the debtor. The debtor has to attend this meeting and must answer questions about his or her property and financial affairs. If a couple filed a joint petition, both spouses are obliged to attend the meeting. The US trustee will report back to the court within ten days of the meeting, whether or not the case should be presumed to be an abuse, based on the means test.
The debtor must cooperate and provide the trustee with any documents or financial records. The trustee is required by the Bankruptcy Code to ask the debtor questions and to ensure that the debtor is fully aware of the consequences of of Chapter 7 bankruptcy on:
- Credit history
- Their ability to file under a different Chapter
- The effects of a discharge
- The effect of reaffirming debts.
In some cases, the trustees must provide written statements about the above issues before or during the creditors meeting to ensure that the debtor understands the information. Bankruptcy judges may not attend meetings of creditors in order to help preserve independent judgment.
The Bankruptcy Code can provide an eligible debtor with complete relief under Chapters 11, 12 and 13 (6). This condition depends on the debtor's voluntary conversion to Chapter 7 from one of the other Chapters. As such, there are a limited amount of available conversions.
Myths About Chapter 7 Bankruptcy
Myths abound regarding filing under Chapter 7, so it is important to speak to a bankruptcy lawyer about your specific case and how you will be affected. However, to clarify some myths:
Filing for Chapter 7 bankruptcy does not mean that you will lose everything. You will only surrender non-exempt property. In most cases, debtors don't give up anything.
Filing for Chapter 7 will not ruin your credit rating. It will have an effect, but if you have missed payments, your credit rating would already be affected. Bankruptcy allows you to wipe the slate clean and start to rebuild your credit score right away.
You can file for bankruptcy more than once, but waiting times do apply.
Filing for bankruptcy does not mean that you will never be allowed to own anything. In most cases, debtors get to keep all their property and their credit scores can quickly rebound, allowing them to own a home or car again.
Nobody needs to know that you filed for Chapter 7, apart from your creditors. Unlike Chapter 13, your payments are not deducted from your paycheck. Although bankruptcy filings are on the public record, they are not publicized.
Help With Filing for Chapter 7 Bankruptcy
Every person's individual circumstances will determine the right type of filing for your needs. Schedule an initial case review with a San Diego Bankruptcy Attorney today by calling 619 488 6168 and learn more about the options that are available to you.