What is CHAPTER 7 BANKRUPTCY?
A Chapter 7 Bankruptcy has been sometimes referred to as a “fresh start” bankruptcy. Chapter 7 Bankruptcy is the opposite of poker. In poker, you get to hide your cards from other players. In Chapter 7 Bankruptcy, you are required to lay everything on the table. You must disclose all assets and all of your debts. You don’t make payments back to your creditors in a Chapter 7 Bankruptcy. Instead, the focus is on your assets.
In a Chapter 7 Bankruptcy, any non-exempt assets you have are liquidated by the Chapter 7 trustee. The proceeds are then used to pay toward your debts. To the extent your debts don’t get paid off, they get discharged, or wiped out, tax free, forever. The vast majority of Chapter 7 Bankruptcy cases are what we refer to as “no-asset” cases -meaning there are no non-exempt assets to liquidate and no proceeds to disburse to creditors.
Who can file Chapter 7 Bankruptcy?
In order to file Chapter 7 Bankruptcy in a particular state, you must meet certain residency requirements.It’s not possible to move to Minnesota and file Chapter 7 Bankruptcy in Minnesota after being there one day.
There are also limitations on filing Chapter 7 Bankruptcy if you have filed Chapter 7 or Chapter 13 Bankruptcy before. So, whether you have filed prior bankruptcies will be an issue in determining whether you can file a Chapter 7 Bankruptcy now.
Finally, in order to file Chapter 7 Bankruptcy, you will need to qualify to do so under the Chapter 7 means test. There are presumptions of abuse that occur if your income and expenses fall within certain ranges. The idea is, if you have surplus income, a presumption of abuse may arise preventing you from filing Chapter 7 Bankruptcy and instead requiring you to think about a Chapter 13 bankruptcy.
COMMON CAUSES OF CHAPTER 7 BANKRUPTCY
There are numerous things that cause people to file Chapter 7 Bankruptcies. The list of negative things that can affect the human condition are too numerous to count.However, there are threads that run thought out the vast majority of Chapter 7 Bankruptcies filed throughout the United States.
There are five common reasons that cause Americans to file Chapter 7 Bankruptcy. They are:
- Business failure
- Income drop
- Relationship break ups/divorce
- Medical problems
- Bad financial decisions
Occasionally, clients may have one of these. Sometimes clients have all five. But, if you are digging for the root cause of the vast majority of Chapter 7 Bankruptcy filings in the United States, you will likely find one or more of those causes on this list.
WHAT NOT TO DO BEFORE FILING Chapter 7 Bankruptcy
If you are contemplating filing Chapter 7 Bankruptcy anytime in the near future, there are things that you should not do before filing Chapter 7 Bankruptcy. It’s not that doing these things will necessarily prevent you from being eligible to file Chapter 7 Bankruptcy, it’s that doing these things will complicate your Chapter 7 Bankruptcy.
First, do not pay relatives or business partners/associates any money you owe them before you speak to a competent bankruptcy lawyer. Second, do not transfer any assets for less than fair market value to anyone. Third do not hide or conceal your assets from creditors with the intent to hinder, delay, and defraud your creditors.
Your best bet is to always speak to a competent bankruptcy lawyer before doing anything.
There are a number of common fears and questions raised by the public time and time again. These are fears and questions we would all have about Chapter 7 bankruptcy and they often come out in the very first phone call a law office receives.
Is a Chapter 7 Bankruptcy Public Information?
When it comes to Chapter 7 Bankruptcy there are no shortage of anxieties about the affect filing Chapter 7 Bankruptcy has on the person looking into it. Yes, Chapter 7 Bankruptcy is public information. If someone wanted to search for who has filed bankruptcies bad enough they could find it. For the vast majority of people who file bankruptcy their credit scores improve when they receive a Chapter 7 discharge. Why? Because they have no debt. Chapter 7 Bankruptcy remains on your credit report for 10 years.
How Does Chapter 7 affect my credit report?
How long does CHAPTER 7 remain on my credit report?
What will my credit score be after I file?
Can you get Financing to buy homes/cars afterWORDS?
Will I be able to rent again?
Thousands of people across the United States file Chapter 7 Bankruptcies each year. They go on to finance homes and finance vehicles after their Chapter 7 Bankruptcy, and even rent. This includes obtaining credit card solicitations in the mail even before the Chapter 7 Bankruptcy is even completed.
Can I get credit cards after filing?
Is there a minimum amount of debt I need to HAVE?
If you are suffering from paying back debt, and the creditors will not leave you alone, there is no amount that is too small to file on. Now, if you start to get below 5k, most lawyers will cringe and try desperately to seek alternatives to Chapter 7 Bankruptcy that may be cheaper. Most bankruptcy lawyers will tell you to stop paying your creditors as soon as you know you are going to file Chapter 7 Bankruptcy.
When do I stop paying my creditors?
Will Filing Chapter 7 negatively affect my spouse?
Filing a Chapter 7 Bankruptcy will not negatively affect your spouse’s credit. You are filing bankruptcy, not your spouse. With that said, if your spouse is a co-debtor on a debt with you, your liability for the debt goes away but your spouses does not. Your spouse will want to continue to pay on any debts in which they are co-debtor with you if they don’t want their credit affected.
What happens to my co-debtor when I file Chapter 7?
What should come first, my divorce or my bankruptcy?
If you are considering bankruptcy, and going through divorce, it generally makes sense to file the Chapter 7 Bankruptcy first. The Chapter 7 Bankruptcy clears away a debt issue which probably one of the contentions in the divorce and filing the Chapter 7 Bankruptcy first also puts your soon to be ex-spouse on notice that you are filing bankruptcy on these debts.
Can my Chapter 7 Bankruptcy be denied?
Chapter 7 Bankruptcies can be denied but it rarely occurs. The reasons why a Chapter 7 Bankruptcy may not go through are usually limited to A) debtor earning too much money to be in a Chapter 7 Bankruptcy or B) debtor has lied on the schedules or done something else nefarious to cost them their discharge under Section 727 of the Bankruptcy Code.
How long does it take to get a discharge?
It takes about 3-4 months to receive a Chapter 7 Bankruptcy discharge.
Will my employer find out ABOUT MY BANKRUPTCY?
Employers do not find out you filed Chapter 7 Bankruptcy unless you volunteer it or you owe your employer money. Future employers may find out you filed Chapter 7 Bankruptcy if you volunteer it or they ask for a credit check as a condition of employment. You cannot be discriminated against for filing Chapter 7 Bankruptcy. You cannot be terminated or have employment affected solely by the fact you filed Chapter 7 Bankruptcy.
What is The property of the estate?
The commencement of a voluntary Chapter 7 Bankruptcy case under Section 301 of the Bankruptcy code starts with the filing of a petition for relief under Chapter 7 Bankruptcy that is filed with the bankruptcy court.
Generally speaking, all legal and equitable interests owned by debtor on the date the petition is filed with the court is considered an asset of the bankruptcy estate. This would include debtor’s house, vehicles, furnishings, clothing, business interests, pensions, jewelry, animals, claims against anyone and more.
Technically speaking, as of the date a petition for Chapter 7 Bankruptcy is filed with the bankruptcy court, the Chapter 7 Bankruptcy estate “owns” all assets of the bankruptcy estate. Debtors typically remain in possession of the assets of the bankruptcy estate. Debtors continue to occupy their homes, drives their vehicles, and use all other assets of the estate just like they had done prior to filing Chapter 7 Bankruptcy.
Section 541 of the Bankruptcy Code defines more clearly what are assets of the Chapter 7 Bankruptcy Estate.
What is not property of the estate?
Section 541(b) also defines assets that are not assets of the bankruptcy estate. It includes certain non-residential leases that expire before commencement of the case and certain monies placed into Education IRA’s or Section 529 plans among other assets.
What is an exempt asset?
An exempt asset is an asset in which debtors are able to claim a state or federal exemption on and retain not only possession of the asset but ownership of the asset as well. There are a set of federal exemptions debtor can choose from under Section 522 of the bankruptcy code.
Bankruptcy Rule 4003(a) requires debtor to list the property debtor claims to be exempt.
State or federal exemptions?
Each state in the union is different. Some states allow you to opt out of the state exemptions and choose either state or federal exemptions. Some states require residents to use state exemptions only.
What happens to exempt assets?
When debtor files Chapter 7 Bankruptcy, debtor’s attorney uses exemptions to protect debtor’s assets, to the extent possible. This claim of exemptions made by debtor can be objected to by a Chapter 7 trustee. Pursuant to Bankruptcy Rule 4003(b) an objection must be filed within 30 days after the Section 341 meeting is concluded or after an amendment to the list is filed with the court, whichever is later. Once the objection period passes, title to the assets claim exempt, but not objected to, revert back to debtor.
What is a non-exempt asset?
A nonexempt asset is an asset of the estate debtor did not claim an exemption on or one in which debtor claimed an exemption on but to which Chapter 7 trustee objected and the court sustained the objection to debtor’s exemption.
What happens to nonexempt assets in Chapter 7?
Section 704 of the Bankruptcy Code outlines the duties of a Chapter 7 trustee. One of the duties is to liquidate assets of the bankruptcy estate. In other words, trustees are required to sell and reduce to money nonexempt assets of the bankruptcy estate and distribute the proceeds to creditors based on a list of priorities.
What does it mean to abandon an asset of the estate?
Section 554 of the Bankruptcy Code outlines the Chapter 7 trustees’ right to abandon assets of the estate. Occasionally, assets of the estate would be burdensome to administer or is of inconsequential value to the estate, so trustee’s “abandons” the asset. For example, a chapter 7 trustee may choose to abandon the estate’s interest in a junk vehicle valued at $200.00.
Any asset listed but not administered at the time of the closing of the estate is deemed abandoned by trustee under Section 554 of the Bankruptcy Code. When an asset is abandoned, ownership reverts back to debtor.
What are debts?
Simply put, a debt is any liability on a claim. It could be credit card debt, it could be medical bills, car loans, mortgages, or contingent liabilities like a car accident claim. A debt could be any liability someone or some entity claims you have on a claim they believe they possess against you.
The bankruptcy Code outlines certain debts that are not discharged in a Chapter 7 Bankruptcy. Sometimes, debts are dischargeable unless someone objects and the court sustains the objection. Sometimes, debts are not dischargeable regardless of whether someone objects or not. If the debt is not dischargeable, your liability remains on the debt after receiving a Chapter 7 discharge under Section 727 of the Bankruptcy Code.
Common debts not discharged in Chapter 7 Bankruptcy/ no objection needed-
- Alimony, child support, and 941 or sales taxes are not discharged in Chapter 7 Bankruptcy
- Student loans are not discharged in Chapter 7 Bankruptcy. There is an exception to this rule.
- Income taxes are not discharged in Chapter 7 Bankruptcy. There are exceptions to this rule.
- Credit card debt
- Loans – all types
- Trade payables
- Medical bills
- Deficiencies on any loans
- Disclaimer- Section 366 of the Bankruptcy Code requires debtor to pay a deposit for
- continued usage.
- Joint debts
- Disclaimer- debtor liability goes away but non-filing co-debtor liability remains.
Common objections to discharge
The above debts are “dischargeable”. In other words, they are discharged unless someone objects and the bankruptcy court sustains the objection.
Section 523 of the Bankruptcy Code lists a variety of reasons why a creditor could object to discharge but the most common is fraud. If debtor uses a credit card without the intent to repay the debt, that is fraud. There are statutory presumptions of fraud where debtor has the burden of overcoming the presumption of fraud. If the statutory presumption of fraud is not triggered, creditor has the burden of proving fraud.
What are priority debts and what are some examples of priority debts?
Section 507 of the Bankruptcy Code lists a set of debts that are priorities. Priority debt simply means that should there be money available for distribution in a Chapter 7 Bankruptcy, certain creditors get paid first, second, and third and so on.
Priorities include, domestic support obligations, ie child support and alimony, taxes, and administrative expenses of the estate amongst others.
What is a preference?
The idea of a preference is that you “preferred” one creditor over another creditor. The Bankruptcy Code defines when debtor made a preferential payment to general unsecured creditors and “insiders” generally considered family members or business partners.
General unsecured creditors
The Bankruptcy Code says that if debtor paid a general unsecured creditor 600 or more within 90 days prior to debtor filing Chapter 7 Bankruptcy, that is a preference. The code makes a distinction for preferences if debtor’s debts are primarily consumer debts or non-consumer debts.
The Bankruptcy code defines an insider, generally speaking, as a family member or business partner. If you paid 600 or more to an insider within 1 year prior to filing bankruptcy, this is deemed to be a preferential payment. The code makes a distinction for preferences if debtor’s debts are primarily consumer debts or non-consumer debts.
Defenses to preferences
Section 547(c) of the Bankruptcy Code also defines defenses to preferences. Some of the more common defenses are:
- New value defense
- Ordinary course of business
- Security interest
What does a Chapter 7 trustee do with a preference?
A Chapter 7 trustee’s duty is to collect these preferences and disburse the money collected to creditors pro rata and always based on priorities.
What is a fraudulent transfer?
A fraudulent transfer, generally speaking, is a transfer of an asset to anyone else for less than fair market value.
Section 548 of the Bankruptcy Code states that trustees can avoid any transfer of assets to anyone for less than fair market value.There are some limited exceptions to this if the organization is qualified as a religious or charitable organization and the transfer is limited to a certain amount.
State based claims
Trustees may also use state statutes to avoid transfers made to others typically for the purpose of hindering, delaying, and defrauding creditors.
What do trustees do with proceeds received from a fraudulent transfer?
Trustees collect these proceeds and disburse the proceeds to creditors pro rata and based on the list of priorities out lined in Section 507 of the Bankruptcy Code.
What happens when you file Chapter 7 Bankruptcy?
- Meet with competent Bankruptcy counsel. Avoid meeting with paralegals - they cannot give you legal advice and they cannot sign you up for bankruptcy. Avoid out of state companies. Only use competent bankruptcy counsel located in your state of residence.
- Review and sign appointment-
- Attend 341 meeting of creditors
The purpose of the review and sign appointment is to make sure all your assets and debts are completely disclosed and that the questions asked of you are addressed fully. The schedules filed with the bankruptcy court must be complete, correct, and accurate.
The Bankruptcy Code requires all debtors to complete a US Trustee approved Credit Counseling Course prior to filing bankruptcy. This course can be done by phone, on-line, or in person.
You will want to have your credit reports pulled (Trans Union, Equifax, and Experian) so that all your creditors get listed on the schedules. Check with the law firm you are working with, some law firms pull the credit reports for you.
Like credit reports, you will want to have your asset reports as well to make sure all assets get listed on the schedules. Check with the law firm you are working with, some law firms pull the asset reports for you.
Other information needed
You will also need your last two years tax returns, last 6 months of paystubs, titles to all vehicles and real estate, and a list of all your debts.
Section 301(b) of the Bankruptcy Code states that the filing of the petition constitutes an order for relief. Section 362(a) of the Bankruptcy Code states that the order for relief operates as a stay against most collection activity against debtor and debtor’s assets. There are exceptions to this- for example, the filing of a Chapter 7 Bankruptcy does not stay enforcement of a domestic support obligation or criminal proceeding.
However, all garnishments, levies, repossessions, foreclosures, and evictions against debtor and debtor’s assets are stayed. This means, that upon, filing all these activities must immediately cease.
Duties of The debtor
Section 521 of the Bankruptcy Code outline many of debtor’s duties. These include, but are not limited to filing various schedules with the court, attending a 341 meeting, and cooperating with the Chapter 7 trustee. This provision also requires debtor to send trustee tax returns, bank statements, and paystubs as well.
Duties of The trustee
Section 704 of the Bankruptcy Code outlines the duties of the trustee. These duties include, but are not limited to, reducing the assets of the estate to money, being accountable for the money, and disbursing those proceeds to creditors pro rata and based on a priority system.
Just like there are actions you should not take before filing Chapter 7 Bankruptcy, there are actions you should not take after filing bankruptcy. Unless approved by competent bankruptcy counsel within your state, never transfer any assets after filing bankruptcy. Similarly, never pay creditors unless instructed to do so by counsel. Also, never fail to cooperate with trustee. Never fail to disclose all assets and debts with the court or be completely candid with your bankruptcy counsel.
What is the 341 meeting of creditors?
A meeting of creditors must be convened by the US Trustee’s Office within a reasonable time from filing the Chapter 7 Bankruptcy. In the vast majority of cases, creditors do not appear. Instead, the Chapter 7 trustee asks debtor to verify that the information on the schedules is true, correct, and complete.Section 343 of the Bankruptcy Code requires debtor to submit to this examination under oath.
Who normally attends the meeting of creditors?
Chapter 7 trustee, debtor, debtor’s counsel, creditor, and creditor’s counsel.
What happens at the meeting of creditors and how long does it last?
Typically, the Chapter 7 trustee asks you to verify that the information on the schedules is true, correct, and complete.The vast majority of hearings are held with the Chapter 7 trustee, debtor, and debtor’s counsel and no one else present. The meeting typically lasts anywhere from 5-10 minutes.
What happens after the meeting of creditors?
- Reaffirmation agreements- creditor and debtor may negotiate a reaffirmation agreement and file it with the court.
- Redemption agreements- creditor and debtor may negotiate redemption agreements and file it with the court.
- 523 objection- The most common adversary proceeding brought is an objection to debtor discharging a debt for fraud under Section 523(a)(4) of the Bankruptcy Code. For example, if debtor took a 10k cash advance 2 days prior to filing Chapter 7 Bankruptcy, debtor may see an objection brought under this provision objecting to debtor discharging the 10k cash advance.
- Motion For Relief Section 362(d) of the Bankruptcy Code governs creditors request to terminate the automatic stay.There are requirements that creditors must meet in order to terminate the automatic stay. A creditor may seek termination of the automatic stay if debtor has abandoned creditor’s collateral or creditor’s collateral is in jeopardy of losing value if not recaptured as soon as possible.
Can I convert my Chapter 7 Bankruptcy to a Chapter 13 Bankruptcy prior to discharge?
Section 706 of the Bankruptcy Code give debtor the right to convert their case from a Chapter 7 Bankruptcy to a Chapter 13 Bankruptcy at any time.
When does the discharge occur?
The Chapter 7 discharge is granted approximately 60 days after the 341 meeting is concluded.
Can I sue creditors who violate the discharge?
Section 524 of the Bankruptcy Code describes the effect of receiving a Chapter 7 Discharge. Italso creates the basis in which to bring an action against creditors who violate the discharge.
Can my Chapter 7 discharge be denied?
Section 727 of the Bankruptcy Code forms the basis for denial of a Chapter 7 discharge. There are numerous reasons why your Chapter 7 discharge could be denied such as making a false statement on the schedules or at the hearing or for concealing assets from the Chapter 7 trustee, among others.
Can my Chapter 7 Bankruptcy be dismissed?
Section 707 of the Bankruptcy Code provides the basis for dismissing a Chapter 7 Bankruptcy case. In the event your case is over the median income and produces a positive enough distribution to unsecured creditors, your case can be dismissed. Section 349 of the Bankruptcy Code governs the effect of dismissal and any subsequent bar to refiling and what happens to your creditor’s claims.
How do I get rid of judgments on the public record?
There is a statutory process in most states to removes judgments from the public record. That is, if Capitol One received a judgment against you for pre-petition debt, there is a way typically to remove that judgment. Ask you lawyer what your state’s process is to have those judgments removed.
How do I fix my credit reports when they are reporting incorrect information?
You have a right to review and correct your credit reports with Equifax, Transunion, and Experian. It is important to review your credit reports post discharge and send a dispute form to each credit reporting agency disputing any incorrect information on your credit reports. Credit agencies have 30 days to correct the incorrect information.
Is it possible to still add creditors after you file bankruptcy?
In many instances, it is possible to add pre-petition creditors to your bankruptcy after your Chapter 7 Bankruptcy has been filed. Check with your local state attorney to see if it is possible in your area.
Can I acquire assets after receiving a Chapter 7 discharge?
Yes, you can acquire almost any asset after receiving a Chapter 7 discharge and it is not a problem. There are two assets that do become property of the estate even though they may be acquired after you filed the Chapter 7 Bankruptcy. One is an inheritance and the second is a divorce settlement. Check with your local bankruptcy attorney for more information on this.
Can I acquire auto, home, or credit card loans after receiving a Chapter 7 discharge?
Yes, there is no bankruptcy prohibition against acquiring new debt after bankruptcy.
Am I protected against discriminatory treatment for filing Chapter 7 Bankruptcy?
Section 525 of the Bankruptcy Code outlines the protections afforded debtors against discriminatory treatment. One of those protections is a private employer cannot terminate employment or discriminate against employment of an individual solely because debtor filed Chapter 7 Bankruptcy and received a discharge.
Who are the Chapter 7 players and what do they do?
- Chapter 7 trustee- Section 321-331 of the Bankruptcy Code govern the selection and appointment of Chapter 7 trustees. Trustees are typically lawyers appointed by the US Trustee’s Office. Their duties are outlined in Section 704 of the Bankruptcy Code. Their primary function is to reduce to money assets of the bankruptcy estate and disburse those funds expeditiously as possible, pro rata, to creditors based on a priority system.
- Debtor(s) - Debtors can be individuals, married couples, or corporations. Only married couples can file joint Chapter 7 cases. Debtor’s duties are outlined in Section 521 of the Bankruptcy Code.
- Debtor’s attorney- only an attorney can give you legal advice and retain you as a client. Never meet with a paralegal or non-lawyer. They simply cannot give you legal advice or retain you as a client.
- Creditor(s)- any entity that purports to have a claim against you for liability on a debt.
- Creditor’s attorney- Only an attorney can give legal advice. Never meet with a paralegal or non- lawyer. Neither a paralegal nor non-lawyer can give you legal advice or retain you as a client.
- Bankruptcy judge- A lawyer who has been appointed to the bankruptcy bench. They serve 14 year terms. The number of bankruptcy judges is determined by Congress.
CHAPTER 7 BANKRUPTCY Definitions*
- Attorney- the term attorney means attorney, professional law association, corporation, or partnership, authorized under applicable law to practice law.
- Creditor- means an entity that has a claim against debtor that arose at the time of or before the order for relief concerning debtor.
- Debt- the term “debt” means liability on a claim.
- Claim- right to a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. Also, a claim can be an equitable remedy for breach of performance.
- Debtor- means a person or municipality.
- Domestic Support Obligation- money paid in the nature child support or alimony.
- Insider- relative or business partner of debtor.
* Definitions abbreviated and taken from Bankruptcy Code