- Chapter 7 bankruptcy, what is it and how does it work?
A Chapter 7 bankruptcy case is a proceeding under federal law in which the debtor seeks debt relief under Chapter 7 of the Federal Bankruptcy Code. The person who files for a Chapter 7 bankruptcy is called the debtor. In a Chapter 7 case, the debtor must turn his or her nonexempt property, if any exists, over to a trustee, who then converts the property to cash and pays the proceeds to the debtor’s creditors. A creditor is a person or firm to whom money is owed. In return, the debtor receives a Chapter 7 discharge, if he or she pays the filing fee, is eligible for the discharge, and complies with the orders and rules of the bankruptcy court.
Bankruptcy law allows debtors to keep a certain amount of property after going through bankruptcy proceedings. This is called exempt property because it is exempt from the bankruptcy estate. Property that cannot be exempted is, appropriately, called non-exempt property. Generally, a bankruptcy debtor can exempt a certain amount of his or her property during bankruptcy. If done right, this can potentially save most of the property of someone going through bankruptcy.
Property that is exempt can generally be called the necessities of modern life. This generally includes the sort of items that are necessary for living and working. Bankruptcy law is concerned about getting debtors out of crushing debt and putting them back on their feet. Taking everything from them is counterproductive, and bankruptcy law recognizes this fact. Non-exempt property generally covers items that fall outside of the necessities for living and working.
Below are examples of property that a Chapter 7 debtor will usually have to give up (non-exempt property), and property that the debtor may usually keep (exempt property).
Property That Is Not Exempt
Items that the debtor usually has to give up include:
- Expensive musical instruments, unless the debtor is a professional musician
- Collections of stamps, coins, and other valuable items
- Family heirlooms
- Cash, bank accounts, stocks, bonds, and other investments
- A second car or truck
- A second home or vacation home
Property That Is Exempt
Exempt property (items that a debtor may usually keep) can include:
- Motor vehicles, up to a certain value
- Reasonably necessary clothing
- Reasonably necessary household goods and furnishings
- Household appliances
- Jewelry, up to a certain value
- A portion of equity in the debtor’s home
- Tools of the debtor’s trade or profession, up to a certain value.
- A portion of unpaid but earned wages
- Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account
- Damages awarded for personal injury
- 2. What is a Chapter 7 discharge?
A Chapter 7 discharge is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect the debts from the debtor. In other words, the debtor is no longer legally obligated to pay any debts that are discharged in a Chapter 7 bankruptcy.
- What types of debts are dischargeable in a Chapter 7 bankruptcy?
Although some debts are nondischargeable, most people filing for Chapter 7 bankruptcy will be able to discharge most if not all of their debts that arose before the date of filing of the bankruptcy petition. However, it is important to note that the debtor is still responsible for any debt he or she incurs after filing the petition.
While credit card debt is the most common type of dischargeable debt, there are many other types of debt that a Chapter 7 bankruptcy will discharge including:
- collection agency accounts
- medical bills
- personal loans from lending institutions, friends, family, and employers
- utility bills (past due amounts only)
- dishonored checks (unless based on fraud)
- repossession and foreclosure deficiency balances
- auto accident claims (except those involving drunk driving)
- business debts
- money owed under lease agreements (includes past due rent)
- civil court judgments (unless based on fraud)
- tax penalties and unpaid taxes past a certain number of years
- attorney fees (except child support and alimony awards)
- revolving charge accounts (except extended payment charges)
- social security overpayments, and
- veteran’s assistance loans and overpayments.
- What types of debts are not dischargeable in a Chapter 7 bankruptcy?
Certain types of debt are by law not dischargeable in Chapter 7 and debts of this type will not be discharged even if the debtor receives a Chapter 7 discharge. The following is a list of the most common types of debts that are not dischargeable in a Chapter 7 case:
- Most tax debts and debts that were incurred to pay nondischargeable federal tax debts.
- Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement, if the creditor files a complaint in the bankruptcy case.
- Debts not listed on the debtors Chapter 7 forms, unless the creditor knew of the bankruptcy case in time to file a claim.
- Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the bankruptcy case.
- Debts for domestic support obligations, which include debts for alimony, maintenance, child support, and certain other divorce-related debts.
- Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the bankruptcy case.
- Debts for certain fines or penalties.
- Debts for most educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and/or his or her dependents.
- Debts for personal injury or death caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated.
- How much is the filing fee in a Chapter 7 and when is it due?
The filing fee for a Chapter 7 bankruptcy is $335.00 for either a single or a joint case. The filing fee is payable when the bankruptcy petition is filed with the court. The court can waive payment of the filing fee if the debtor can show that his or her income is less than 150% of the official poverty line and that he or she is financially unable to pay the filing fee. The court may also allow the debtor to pay the filing fee in up to four installments, with the final installment due within 120 days.
- What is the Chapter 7 means test?
The Means test was designed and written by the credit card companies target high-income debtors make them ineligible for bankruptcy. In reality, the law has been largely unsuccessful in stopping or slowing anyone from filing bankruptcy. In fact, because it was so poorly drafted, it appears that even more people are qualified for bankruptcy than before.
The means test applies only to consumer debtors. If you are primarily a business debtor, you are eligible for bankruptcy even if you have a high income.
Consumer debtors are the primary beneficiaries of the federal bankruptcy system. The term “consumer debtors” refers to individual debtors whose debts were incurred primarily for personal, family or household purpose. Consumer debts include credit cards, medical bills and personal loans.
The means test involves a six-month “Look-back.” The law requires a debtor to produce proof of all income the last six months, (including such things as gifts, withdrawals from 401K plans and gambling winnings). The means test then presumes the debtor’s income will be identical in the future based on what was in the past and it determines the debtor’s eligibility based on that usually fictitious number.
This fictitious number is known as the current monthly income but it isn’t current, it isn’t monthly, and it isn’t income. The use of a look back causes huge problems for debtors who just lost their jobs, took a pay cut, had a one-time bonus at work, or just took a 401(k) withdrawal to get by.
The means test presumes that persons earning over the median income are too rich to file for bankruptcy. That means test comes in two stages:
- If the debtor’s income, when combined with any and all income from all members of household, is under the median income then he passes the means test and can file a Chapter 7 bankruptcy.
- If a debtor’s income, combined with any and all income from all members the household, is above the median, that he fails the means test and must pass a more complicated evaluation of his ability to pay his creditors which involves a complicated math formula based on the IRS collection standards.
- May a married couple file a Chapter 7 bankruptcy together?
Yes. The married couple may file a joint case under Chapter 7. If a joint Chapter 7 case is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. However, both spouses must receive the required credit counseling before the case is filed and both must complete the required financial management course after the case is filed.
- Under what circumstances should a married couple file a joint Chapter 7 case?
The married couple should file a joint Chapter 7 case if both of them are liable for one or more significant dischargeable debt. If both spouses are liable for a substantial data and only one spouse files under Chapter 7, the creditor may later attempt to collect the data from the nonfiling spouse.
- How does the filing of a Chapter 7 case affect collection efforts or legal proceedings that have been filed against the debtor?
The filing of a Chapter 7 case automatically suspends virtually all collection efforts and legal proceedings pending against the debtor. A few days after the Chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further collection and legal action against that person. This court ordered the suspension of creditor collection activity against the debtor is called the automatic stay. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable in damages to the person filing. The automatic stay does not affect criminal proceedings and actions to collect domestic support obligations. The automatic stay also does not protect cosigners and guarantors of the debtor, and a creditor may continue to collect debts from those persons after the case is filed.
- How does filing a Chapter 7 case affect a person’s credit rating?
It will usually worsen it, if that is possible. However, filing a Chapter 7 case also begins the process of repairing the debtor’s credit rating by drastically improving the debtor’s debt to income ratio which is an important factor in the credit rating. A Chapter 7 bankruptcy often immediately adds 50 points to the debtor’s credit rating. Additionally, some financial institutions openly solicit business from persons have recently filed under Chapter 7, because will be at least eight years before the debtor can file another Chapter 7 case.
- Are the names of persons who file Chapter 7 bankruptcy cases published?
When a Chapter 7 case is filed, it becomes a public record and the names of the persons filing may be published by some credit reporting agencies. However, newspapers very rarely report or publish the names of consumers who file Chapter 7 cases.
- Are employers notified of Chapter 7 cases filed by employees?
Employers are not usually notified when the Chapter 7 cases filed, however, the trustee in a Chapter 7 case may contact an employer seeking information regarding the person’s wages or salary or to verify a person’s current monthly income. This rarely happens.
- Does a debtor lose any legal or civil rights by filing a Chapter 7 bankruptcy?
No. A Chapter 7 cases is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
- Will a debtor lose all of his or her property if he or she files a Chapter 7 case?
Usually not. Certain property is exempt and may not be taken by creditors unless it is encumbered by valid mortgage or lien. A person is usually allowed to retain his or her unencumbered exempt property in a Chapter 7 case. Encumbered property is property against which a creditor has a valid lien, mortgage or other security interest.
- What is exempt property?
Exempt property is property that is protected by law from the claims of creditors. In bankruptcy cases property may be exempt under either state or federal law. Exempt property typically includes all or a portion of a person’s unpaid wages, home equity, automobile, household furniture and appliances and personal effects. Your attorney will inform you as to the property that is exempt in your case.
- When must the debtor appear in court in a Chapter 7 case and what happens there?
The first court appearance is for a hearing called the meeting of creditors, which is usually held about a month after the case is filed. The debtor must bring photo identification, his or her social security card, his or her most recent pay statement and all of his or her bank and investment account statements to this hearing. At this hearing the debtor is put under oath and questioned about his or her debts, assets, income and expenses; but any creditor that does appear is usually allowed to question the debtor. For most debtors this will be the only court appearance required.
- What if the debtor has no nonexempt property for the trustee to collect?
If the debtor has no nonexempt property, notice will be sent to the creditors advising them that there are no assets from which to pay creditors and that it is unnecessary for them to file claims. This type of cases referred to as a no-asset case. The vast majority of Chapter 7 cases that are filed by consumers are no-asset cases.
- How are secured creditors dealt with in a Chapter 7 case?
Secured creditors are creditors with valid mortgages or liens against property of the person filing. Property that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually permitted to repossess or foreclose on its secured property, unless the value of the secured property greatly exceeds the amount owed to the creditor. The claim of a secured creditor is called a secured claim and secured claims are collected from or enforced against encumbered property. The secured creditor must prove the validity of its mortgage or lien and must usually obtain a court order before repossessing or foreclosing unencumbered property. Encumbered property should not be turned over to a secured creditor until a court order to do so has been obtained.
- How are unsecured creditors dealt with in a Chapter 7 case?
An unsecured creditor is a creditor without a valid lien or mortgage against property of the person filing. If the person filing has nonexempt assets, unsecured creditors may file claims with the court within 90 days after the first date set for the meeting of creditors. When the trustee has collected all of the debtor’s nonexempt property and converted it to cash, the trustee will distribute the funds in the form of dividends to the unsecured creditors according to the priority set forth in the bankruptcy code. Domestic support obligations, administrative expenses, claims for wages, salaries, and contributions to employee benefit plans, claims for the refund of certain deposits and tax claims are given priority in that order in the payment of dividends by the trustee. If there are funds remaining after the payment of these priority claims, they are distributed pro rata to the remaining unsecured creditors. In Chapter 7 cases filed by consumers, unsecured creditors usually get nothing.
- How may a debtor minimize the amount of money or property that must be turned over to the trustee any Chapter 7 case?
In a Chapter 7 case the debtor is required to turn over to the trustee only the nonexempt money or property that he or she possessed at the time the case was filed. Many nonexempt assets are liquid in nature and tend to vary in size or amount from day to day. It is wise, therefore, to engage in some bankruptcy estate planning so as to minimize the value or amount of these liquid assets on the day that the Chapter 7 case is filed. The most common nonexempt liquid assets, and the assets that the trustee will be most likely to look for, include the following:
(2) bank accounts
(3) tax refunds
Therefore, it is usually advantageous to take steps to ensure that the value of each of these assets is as low as possible on the day the Chapter 7 cases filed. By doing this the person will not be cheating or acting illegally; he or she will simply be using the law to his or her advantage, much the same as a person who takes advantage of the tax laws by selling property at the appropriate time.
Cash. If possible, the person filing should have no cash on hand when the Chapter 7 case is filed. Money possessed or obtained shortly before the filing of a Chapter 7 case may be spent on such items as food and groceries, the Chapter 7 filing fee, the attorney’s fees in the Chapter 7 case, and the payment to creditors whose claims the debtor intends to continue paying after the filing of a Chapter 7 case. However, payments should not be made as gifts or loans to friends or relatives as the trustee may later recover these payments.
Bank accounts. The best practice is to have all account balances as close to zero as the bank will allow.
Tax refunds. In most states, including Pennsylvania, a tax refund is not exempt and becomes the property of the trustee if it has not been received by the person prior to the filing of a Chapter 7 case. Therefore, if a tax refund is expected, a Chapter 7 case should not be filed until after the refund has been received and validly disposed of. The best practice then is to either file the Chapter 7 case early in the tax year or make arrangements to ensure that there will be no tax refund for that year.
- Will I lose my house or my car if I file for bankruptcy protection?
As long as you stay current on your mortgage and/or car payments, you will keep your house and your car in almost all cases.
- May a utility company refused to provide service to a debtor if the company’s utility bill is discharged under Chapter 7?
If, within 20 days after the Chapter 7 case is filed, the debtor furnishes a utility company with a deposit or other security to ensure the payment of future utility services, it is illegal for a utility company to refuse to provide utility service to a debtor after the case is filed, or to otherwise discriminate against the debtor, if its bill for past utility services is discharged in a Chapter 7 case.
- What if a person wishes to repay a dischargeable debt?
A person may repay as many dischargeable debts as desired after filing a Chapter 7 case. By repaying one debt, a person does not become legally obligated to repay any other debts.
- How long does a Chapter 7 case last?
A successful Chapter 7 case begins with the filing of the bankruptcy forms and ends with the closing of the case by the court. If there are no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the person filing receives his or her discharge, which is usually about four months after the case is filed.
- What should the debtor do if a creditor later attempts to collect a debt that was discharged in his or her Chapter 7 case?
When the Chapter 7 discharge is granted, the court enters an order prohibiting creditors from later attempting to collect any discharged debt from the person filing. If the creditor later attempts to collect a discharged debt from the person, the person should give the creditor a copy of his or her Chapter 7 discharge and inform the creditor in writing that the debt was discharged in the Chapter 7 case. If the creditor persists, the person should contact an attorney. If a creditor filed a lawsuit on a discharged debt, it is important to inform the court in which the lawsuit is filed that the debt was discharged in bankruptcy. The lawsuit should not be ignored because even though a judgment entered on a discharged debt that can later be voided, voiding the judgment may require the services of an attorney which could be costly.
- How does a Chapter 7 discharge affect the liability of cosigners and other parties who may be liable to a creditor on a discharged debt?
A Chapter 7 discharge releases only the person or persons who filed the Chapter 7 case. Liability of any other party on a debt is not affected by a Chapter 7 discharge. Therefore, a person who has cosigned or guaranteed a debt for the person filing is still liable for the debt even if the person filing receives a Chapter 7 discharge with respect to the debt.
- What is the role of the debtor’s attorney in a Chapter 7 case?
The attorney for the person filing performs the following functions in a typical Chapter 7 consumer case:
(1) Analyze the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor’s financial problems.
(2) Advise the person filing of the relief available under Chapter 7 and the other chapters of the bankruptcy code, and of the advisability of proceeding under each chapter.
(3) Assist the person in obtaining the required pre-bankruptcy budget and credit counseling briefing.
(4) Assemble the information and data necessary to prepare the Chapter 7 forms for filing.
(5) Assist the person filing in arranging his or her assets so as to enable the person to retain as many of the assets as possible after the Chapter 7 case.
(6) Filing the Chapter 7 petitions, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case.
(7) Attending the meeting of creditors with the debtor and appearing with the debtor at any other hearings that may be held in the case.
(8) If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor.
(9) If necessary, assisting the person in overcoming obstacles that may arise to the granting of a Chapter 7 discharge.
The fee paid to an attorney representing the person filing a Chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Most attorneys collect all or most of their fee before the case is filed.
To get further bankruptcy information from one of our attorneys, contact us at (610) 685-1800 or email us at email@example.com.