The Ultimate Guide to Chapter 7 Bankruptcy
What you will learn…
- What is Chapter 7 and what situations it covers
- Chapter 7 fees
- Time-frames to discharge
- All about the mandatory credit counselling meeting
- Chapter 7 forms & documents you need to file
- All about The Meeting of Creditors
- The Voluntary Petition
- How to stop your creditors garnishing your wages & repossessing your house
- Who is the Bankruptcy Trustee and is he your friend or foe?
- When will your bankruptcy be discharged?
- The impact on your credit rating
- The Means Test
- Monthly Income Worksheet download
- When you should consult a lawyer
- Reasons for filing Chapter 7
- How to sue your Creditors for harassment!
- Some alternatives to Chapter 7
- How to negotiate with your creditors for a lower debt amount!
- Do nothing…and win! (Sometimes)
- Beware the IRS!
Chapter 7 of the US bankruptcy code, or the “liquidation bankruptcy”, is capable of canceling most types of debt you may find yourself in. It’s not suitable for everyone, but most people filing under Chapter 7 will be able to keep all their property. As we mentioned in the last Chapter, if your earnings are too high for Chapter 7, your state trustee will be able to sell nonexempt property to pay your creditors. The level of non-exemption varies from state to state and you can find a list of every state’s exemptions here, and federal exemptions here, along with complete details.
The basic cost of filing Chapter 7 bankruptcy is $335 and you can do this out of court and one meeting with your local trustee. The trustee will be appointed by the bankruptcy judge and here’s the official who will process your bankruptcy filing. The complete bankruptcy filing from start to finish will typically take between three and six months.
If you decide to hire a lawyer (highly recommended) there will be a charge on top of this. Lawyers either charge on a percentage basis or add a flat fee on top of the basic charge.
Before filing for bankruptcy, it is mandatory you see a credit counseling agency to look at the non-bankruptcy options available to you. You can visit this agency in-house, on the phone, or even online but it must be an approved agency and within three months of your initial filing. This agency will provide you with a certificate of participation and any repayment plans you work out with them which you must show the court.
If you are injured, unwell, or have a disability which prevents you from taking part in this stage of the process, are on active duty in the military, or can’t find an agency who can speak your language then you may be exempt.
A repayment plan may be the best course of action in your possession and this is a vital step in your road to recovery. There is no point in filing bankruptcy if there is an easier, quicker, and cheaper way to clear your debts.
It is important to mention here that you are not required to take the advice this credit counseling agency offers. You are only required to attend and present to the court any documents that arise from this meeting.
What documents do you need to file?
There is a mountain of documents that you need to file for Chapter 7. This alone can be off-putting for many people but most of them are very easy to complete or won’t be necessary for you at all. After completion they all need to be handed in to your local bankruptcy court.
The best thing to do is to take it slow and steady, making sure all the documents are completed accurately. It should go without saying that at this stage an experienced attorney is recommended. This is the stage for mistakes are very easily made, and mistakes in bankruptcy filing can be extremely expensive if not caught in time.
Upon completion and initial filing your court will issue a notice of your filing to all the creditors that year you have included in your bankruptcy forms, also issuing you a copy. This is called 341 notice, and includes a date that the court sets for the Meeting of Creditors (341 Hearing). Your creditors will be given a deadline for the filing of any objections to your bankruptcy or debt discharge.
The Voluntary Petition
The first document you need to file is called a Voluntary Petition which requests discharge of your debts. It asks for some basic contact and personal information, creditors and debt information, assets and business information and whether you own any property.
Other documents you need to file
Once you’ve triggered the bankruptcy process you have 14 days in which to file some further documents. These include bank statements, wage stubs, tax returns, property and your credit counseling documents.
It’s common at this point to start to notice some errors in your documents. Although correcting these errors is sometimes straightforward, it is recommended that you employ a good lawyer to help you.
What is “The Automatic Stay”?
The automatic stay is the common name for an “Order for Relief”. This is a core part the which immediately stops harassment and claims by creditors demanding payment. If you’ve been through some time worrying about companies threatening lawsuits and continuously calling your house threatening collection then you know how important this stage in the process can be.
It also prevents creditors from garnishing your wages, repossessing your car or house, and cutting off services. There are some exceptions to this and there are ways that creditors can get this lifted through petitioning the courts. It should be noted that it is very common for courts to agree to lift the automatic stay and so you should assume this to be a temporary order only.
A word of caution!
The date of the filing of your bankruptcy is a watershed moment in your financial life. Your debt and your property are effectively owned by the trustee after this date. This means that you can’t transfer ownership of your property without the trustee’s knowledge, although you can borrow money after this date, or buy and sell new property.
Who is the bankruptcy trustee?
The bankruptcy trustee is appointed by the Department of Justice to oversee multiple bankruptcy courts and can be thought of as a bankruptcy investigator. He or she will examine your filing and look for assets to liquidate to pay off your debts. The trustee is not your friend. The more money he can find to pay your creditors, the more he gets paid. The trustee also receives a flat fee of $60 per case, but most of his income comes from the very high percentages of cash and assets recovered.
This is another reason why it’s so important to employee the resources and expertise of an expert law firm such as Bright Associates.
The Meeting of Creditors
As mentioned before, your 341 hearing, or meeting of creditors will be held at a date decided by the trustee after you file your papers. This meeting will be chaired by your trustee and is designed to investigate your case and interrogate you about your filed papers. Your assigned values will be investigated as well as the accuracy of your filings. If any creditors decide to attend they can also question you. You must be present in person at this meeting, along with your lawyer and please remember that any questions you are asked to answer will be under oath.
This will usually be the only time you are required to be present in person during the whole bankruptcy process and will typically only last 5 to 10 minutes. Just be sure to sort out all your family business before commencing with your filing as there’s nothing like an angry ex-husband or ex-wife to make your trustee dig a little deeper into your finances.
Keeping your house & other property safe
You can claim exempt property. Exactly what property and how much varies from state to state. Any property that the trustee thinks is not exempt from your bankruptcy you will have to either surrender or give over an equivalent cash value. The property can also be seized, although in practice that’s unlikely. Whatever happens, don’t hide any property you own and fully cooperate with your trustee or the judge can find you in contempt and order your property seized.
If your nonexempt property is loan value your trustee can “abandon” that, subsequently allowing you to keep it. in practice failing under Chapter 7, usually means that you won’t lose any property unless it’s collateral for your secured debt (see next section).
What about your Secured Debts?
As we mentioned in the last section, some of your property you may have put up as collateral for e.g. a personal loan. This can be your house or your car, and these types of loans are called secured debts. Secured debts will be nonexempt and if there are any outstanding payments due, your creditor is likely to ask for the automatic stay to be lifted. This can result in repossession; however, if you’re up to date on your payments you can usually keep the house or car and continue with your payments as usual.
There are other exemptions to this rule which we will cover later in this article.
If you an assignee to a contract or lease at the time of your bankruptcy, there are some special conditions that your trustee can enforce on it. He or she can assign the lease to a third party in exchange for cash to pay your creditors. Your trustee will assume the lease and assign it to the highest bidder; however, if the trustee doesn’t think that this will be worthwhile then you can continue with the lease as usual.
Personal Financial Management Counseling
To get your bankruptcy discharged, it is mandatory to attend a course on managing your finances. That should only last two hours and is from an agency approved by the US trustee program. As mentioned before, you will receive a certificate that you must file with the court. There is a fee charged for the service but if you are unable to pay it will be waived.
The Bankruptcy Discharge
You will receive your “Notice of Discharge” from the court around two months after your meeting of creditors. This will give you some information on which of your debts have been discharged have been discharged. Usually all your debts will have been discharged except tax debt, student loans and child support, or debts incurred through fraudulent or illegal acts.
After your discharge you can carry on with life as before. The only exceptions to this are if you receive some types of windfalls, e.g. inheritance, divorce settlements etc. These you must report to the court immediately are you may completely lose these assets and your bankruptcy discharge can be revoked.
It is against the law for you to be discriminated against by employers because of bankruptcy, with a few exceptions.
You can’t expect and good credit rating right away, and it may take a few years for you to get good mortgage rates are decent interest on credit cards. Your attorney can help you speed up this process which is another reason why you should seriously consider hiring one to take you through your bankruptcy. You should note that you can file for another Chapter 7 bankruptcy for eight years from your filing date. You can file for Chapter 13 bankruptcy at any time after four years has elapsed from your Chapter 7 discharge.
Please see The Ultimate Guide to Chapter 13 Bankruptcy for complete details.
Can you file Chapter 7?
There are several reasons why you might not be allowed to file for Chapter 7 bankruptcy. If you have a higher income for example, the court will prefer you file under Chapter 13 which means you will be liable to pay back at least some of your debts. If you file under Chapter 7 and the court thinks that you can pay back some or all your debts, your case will be dismissed unless you convert to Chapter 13.
It is your responsibility determine your current monthly income, which is usually your average and come for the previous six months before you file. You will then compare that to the general family incomes in your state for your size of family, and if it is significantly greater then you will be considered eligible for Chapter 13 instead of Chapter 7. This is called the “Means Test”.
If you feel the Means Test, and still fail for Chapter 7 when you clearly should be filing Chapter 13, the court can find this filing “abusive” and prevent you from proceeding further.
You can download our monthly income worksheet here to help you calculate this.
You can also be disallowed for filing for bankruptcy if you have demonstrated wilful dishonesty in your financial matters. Bankruptcy is really designed for people who need a fresh start after being possibly responsible and is not a quick and easy way for criminals to avoid paying their debts. If you have bought assets and put them under other people’s names, concealed property or cash during a divorce, or bought luxury items when you clearly couldn’t afford them then you definitely need to consult a lawyer before filing for bankruptcy. These kinds of actions will not be looked upon favorably by the court.
You also need to adequately explain your debt and how you got into such trouble. You also must explain if you received a cash windfall and why you didn’t use that to pay off your debt, or why you voluntarily left your job while owing money. These can all be seen as grounds for abuse.
Even though these situations sound scary, in actual fact they are highly unlikely to occur. Most Chapter 7 cases are discharged without any problem at all. Employing a good lawyer can certainly smooth the process and highlight any red flags before they occur.
One thing to be very clear about is that any information you submit to the court, whether that be by form or in person you are considered to have done so. Therefore, any hiding of assets, cheating, hiding your identity, or lying to the court can result and a conviction of perjury or fraud, and you certainly will not receive a bankruptcy discharge.
Should you file Chapter 7?
So, you decided you’re eligible for Chapter 7 bankruptcy, have completed your means test and are ready to pull the trigger. Before you do, there is one more question you need to ask yourself: does it actually make financial sense for you to file bankruptcy?
If you have no assets, such as a house or business property, and 100% of your income is from welfare or Social Security then everything you own is exempt and your creditors can’t make a claim against any of it. This means there is no need to file bankruptcy and you should look instead on building a solid financial plan to pay what you owe and get you on the road to a fresh start.
It can be tempting to file bankruptcy to stop your creditors harassing you at home and work. And reality, usually just takes a formal letter to them to stop harassment. Of course, you can also change your phone number or use caller ID to screen call.
Click here to see an example of a successful letter which you can send your creditors to stop harassment. Feel free to use this.
You can file as a couple if you’re married, but if only one are of you is saddled with the majority of the debt and the other has a clean credit rating it may make more sense to file as an individual, especially if you have property that could be placed at risk, or you’re at risk of separation or divorce.
If your creditors refuse to stop harassing you after you have requested via written notice you can actually sue them under the fair debt collection practices act and receive damages of up to $1000. These damages can be awarded for e.g. medical bills for damage caused by the harassment. You are also entitled to lawyer fees.
It also might be possible for you to rebuild your credit sooner after filing for bankruptcy then just wallowing in your debts.
Chapter 7 bankruptcy alternatives
Chapter 13 bankruptcy
We have a full section under Chapter 13 bankruptcy but will outline some of the rules and benefits here.
With Chapter 13 bankruptcy you can pay your debts over time. This can be in full are in part and you must use all of your disposable income to pay back your unsecured creditors.
Chapter 13 usually means you don’t have to surrender your property; however, if that property is nonexempt you may have to pay a fee. There are more conditions to this which we will explain and the Chapter 13 section.
There are some kinds of debts which are not covered by Chapter 13, e.g. alimony and child support, tax date and criminal charges et al.
Talk to your creditors
This may come as a surprise but often the best course of action is to simply, your creditors and negotiate for a new payment plan, or even ask for a reduced amount to pay back. Your creditors may require proof that you struggling to pay your debts and give you a financial form to fill out similar to the means test. You may also have to send them bank statements and Pay checks.
Just be aware that any information you send may be used against you later to e.g. garnish your wages or your bank account.
Credit counseling agencies exist to help you build and your repayment plan which they can negotiate with your unsecured creditors. You can also find specialist lawyers to do this. This can benefit you as you will make one monthly payment to the agency who will distribute it among your creditors.
As long as you continue to make payments on time this can be a great way to get back on your feet; however, if you miss any payments your creditors may stop the deal immediately. So, if you feel you can meet the payments on time every time then this could be the avenue to take but if not, then bankruptcy may be your best option.
This may seem on the face of it to be a terrible option if you have serious money worries; however, if you have no assets and very low-income then your creditors will find it pointless obtaining a court judgment against you. This is simply because they realize they will never be able to collect the funds owed to them.
In the vast majority of cases you won’t go to jail for not paying your debts in America. It might at least be a good option to have a preliminary meeting with a lawyer to discuss your situation if you feel this may apply to you.
If your creditors decided to sue you and get a court judgment against you then you will probably find that most of your property is exempt. They will probably seek to garnish your wages before they come after your property but even if they do they are only entitled to a maximum of 25%. This means you can usually keep 75% of your wages.
If you don’t have a job and regular income then you needn’t worry about being sued. Your creditors cannot take welfare benefits, insurance or Social Security.
Of course, none of this applies to the IRS. All or most of your property is at risk if you owe most tax debts.
Court judgments will be on your record from between 5 and 10 years and can severely affect your ability to borrow money, so if you decide not to file bankruptcy then please be aware that this can impact your life for a long time.
So now you’re equipped with all the information you need to decide whether to file Chapter 7 bankruptcy. You can download our bankruptcy pack including all the forms and spreadsheets you need, call one of our specialist lawyers to help you with the next step, or you can continue reading about Chapter 13 bankruptcy if you think that is more suitable for your needs.
Click here to download your MONTHLY INCOME WORKSHEET