Chapter 7 Bankruptcy
In this article, you will learn about bankruptcy Chapter 7.
Table of Contents
- Should I file for a chapter 7 bankruptcy?
- What is Chapter 7 Bankruptcy?
- What is forgiven in a Chapter 7 Bankruptcy?
- What happens to my car or real estate in a Chapter 7 Bankruptcy?
- How long does chapter 7 stay on credit report?
- How do I file for a Chapter 7 bankruptcy?
- Automatic Stay and Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a law enacted by congress to give a fresh start to eligible citizens who cannot payoff their debt. It is a type of bankruptcy that gets rid of most unsecured debt. Unsecured debt is a type of debt where the borrower has not promised any collateral to creditor. Credit Card debt is an obvious example. Student Loans also fit this definition; however, their dischargeability in a chapter 7 bankruptcy is severely restricted.
As a bankruptcy attorney with years of experience, I’ve noticed two question patterns that come up in my consultations. The first focuses on whether bankruptcy is morally right. Am I a bad person for considering it? Am I trying to get out of my responsibilities by filing for a chapter 7 bankruptcy? Is it right thing to do? How will I be judged?
The second pattern is more technical. How do I qualify for bankruptcy? What is the bankruptcy process like? What is the means test? How do chapter 7 and chapter 13 differ? How does chapter 7 bankruptcy impact my credit score? What are its eligibility requirements? What are exemptions?
Should I file for a chapter 7 bankruptcy?
First consider if your household income is enough to pay-off debt? You should make enough money to pay your bills and have enough leftover to pay debt without causing excessive hardship on yourself and your family. If you can pay off your debt using your extra cash, then you may not need to file a Chapter 7 bankruptcy. If, on the other hand, you don’t see a practicable way out of debt no matter how you restrict your budget, then you may benefit from some debt relief options. Chapter 7 bankruptcy is a type of relief codified in the bankruptcy law suitable for people who cannot reasonably get out of debt.
Assuming that your household does not make enough to pay off your debt, then it is fair to look into lawful solutions that deal with a debt problem that is likely to get worse if ignored. Unpaid loan account balances will keep on accruing interest, and untimely paid credit card bills continue to incur penalties. It generally makes sense to resolve a debt problem instead of letting it fester.
If you look at possible solutions to debt resolution, then Chapter 7 bankruptcy is a powerful option along with Chapter 13 bankruptcy and other types of bankruptcy provided to you by the U.S. Government to give debt relief and a peace of mind. It is not that you are considering something illegal, to the contrary, you are using the laws that are designed by the government to help those citizens who honestly need it.
Look at your debt, look at your income, and decide if you are able to pay back the money you owe. If you can, then do so and you probably don’t need to file for a chapter 7 bankruptcy. If on the other had, you are facing creditor lawsuits, garnishments, repossessions, foreclosures, then that’s a sign that something has be corrected.
Often clients tell me that they don’t want to act irresponsibly, that they want to pay off their debts but they can’t. I feel the burden they carry. In response, I often point out that a realistic outcome-oriented forward-looking approach is more helpful than re-living the past while placing blame on yourself or others. What’s happened, happened. It may be best to look forward. Focus on solutions rather than the past. And if someone is worried about being judged, I point out that they’ll be judged less if the debt challenge is resolved as opposed to letting it fester.
It is worth to consult with a competent bankruptcy attorney to see if any type of bankruptcy makes sense for your situation. Leave the past behind. What can you do now to make things better for you and your family?
What is Chapter 7 Bankruptcy?
Personal Chapter 7 Bankruptcy
It is a law enacted by the U.S. Congress to eliminate qualifying debt. It is part of the U.S. Bankruptcy Code designed to provide a fresh start for hardworking people facing unmanageable debt. It is called a liquidation bankruptcy for individual debtors because, in theory, nonexempt assets (unprotected assets) can be sold off by the bankruptcy trustee to satisfy part or all of the filer’s unsecured debt. The reality is different. Most chapter 7 bankruptcy cases filed in the United States are classified as “no asset” cases, which means that all of the filer’s assets are protected by the applicable exemption laws. If the filer’s assets including real property are protected, then there is nothing for the bankruptcy trustee to liquidate.
If you are googling Chapter 7 bankruptcy, you will probably run into many articles that suggest that your assets will be sold off to satisfy your debt. That’s not entirely accurate. Chapter 7 bankruptcy is a liquidation bankruptcy but that’s only if your assets are un-exempted. Exemptions laws have categories and vary from state to state.
Business Chapter 7 Bankruptcy
Chapter 7 bankruptcy for incorporated businesses that have debt in the business name entail the liquidation of the business assets to satisfy business debt. Incorporated businesses are not entitled to receive a discharge of debt in a chapter 7 bankruptcy like individual debtors can under the bankruptcy code. If a business has permanently stopped operating then it probably does not need for its debt to be discharged. Once the business has ceased existing, the debt owed by that business will become uncollectible and creditors will generally have no recourse unless they have security interests on the business’ collateral. In this respect discharging debt becomes meaningless, since the entity that owes money is insolvent. Nevertheless, a Chapter 7 bankruptcy serves the important purpose of liquidating the defunct business’ assets in an orderly and fair way according to the rules of the bankruptcy code.
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What is forgiven in a Chapter 7 Bankruptcy?
Chapter 7 bankruptcy forgives unsecured debt. Unsecured debt refers to a type of debt that is not backed with a collateral. Credit card debt, medical bills, unsecured loans, signature loans, repossession or voluntary surrender of vehicles deficiencies, and unpaid cell phone or other bills are some of the most common types of unsecured debt forgiven or discharged in a chapter 7 bankruptcy. Theoretically, student loans are a type of unsecured debt; however, discharging student loans is often an unsuccessful process.
Surprisingly, some types of income tax debt are also classified as unsecured debt. And yes, unsecured income tax debt is forgiven in a chapter 7 bankruptcy.
Nondischargeable debts are not forgiven in a chapter 7 bankruptcy and survive a chapter 7 bankruptcy discharge. Alimony, child support, and other types of domestic support obligations survive a chapter 7 bankruptcy as well. Likewise, debt incurred as a result of misrepresentation, fraud and criminal conduct don’t get eliminated in a chapter 7 bankruptcy.
What happens to my car or real estate in a Chapter 7 Bankruptcy?
Real estate and cars are assets that become part of the bankruptcy estate with the filing of the chapter 7 bankruptcy. There are two things to consider when trying to figure out what happens to a car or real estate in a chapter 7 bankruptcy. First, you determine if the car or real estate has a loan attached to it. In other words, do you have a mortgage or a car loan linked to your car or real estate? If you do, then the lender is a secured creditor and has to be willing to work with you. Often creditors are okay with letting you keep the collateral (real estate or car) so long as you are making the loan payments adequately. You also must have the insurance required under the contract you entered into with the creditor.
Second, you determine if your real estate or car equity is exempted under the applicable exemption law. Equity is calculated by deducting the balance of the secured loans from the value of the real estate or car. For example, if your real estate is worth $100,000.00 and your mortgage balance is $40,000.00, then you have $60,000.00 in equity in your property. If you have no mortgage or other encumbrances, then the entire $100,000.00 is equity.
Once you determine the equity amount, you need to see if the equity is exempted/protected under the applicable bankruptcy exemption laws. In Texas, a bankruptcy filer can either select the Texas exemptions or the Federal Bankruptcy Exemptions. Applying the correct bankruptcy exemption law is critically important. Bankruptcy Exemption laws have specific limits, and incorrectly using them could make them subject to liquidation. A bankruptcy lawyer will hypothetically perform a liquidation analysis before filing the chapter 7 bankruptcy case. In doing so, she will anticipate possible issues before filing the case.
How long does chapter 7 stay on credit report?
Experian says that a chapter 7 bankruptcy stays on your credit for up to 10 years. I am not sure why they say “up to”. It implies that it could take less than 10 years. Still, the inner workings of the credit reporting agencies appear to be proprietary and not known to the general public. This question relates to an even more important question I will address next.
To what extent should you care about the length of time a chapter 7 bankruptcy stays on your credit report?
My clients want to know the impact of filing for a chapter 7 bankruptcy on their credit score. They care because creditors do a great job at presenting the credit score as a measure of someone’s worth as a person. They also imply that a good credit score is part of being a good person.
First, nobody’s worth is defined by a credit score; second, a good credit score is primarily good for obtaining credit. It is good for going into debt. Suppose you are considering filing for chapter 7 bankruptcy. In that case, you are probably wanting to eliminate your debt and not incur more if it. Put things in the right prospective. What’s more important right now, eliminate debt or have a way to get more of it?
You can rebuild your credit score, and you don’t have to wait up to 10 years. You can obtain credit right after you receive your chapter 7 bankruptcy discharge. You start slow and pay your new debt debt back on time to improve your credit score even if you filed for a chapter 7 bankruptcy. Your life will go on and your credit score will recover if you borrow money and pay it back the way credit reporting agencies like. Focus on what’s important. Do you need to eliminate your debt or eliminate debt is not that important at the moment?
How do I file for a Chapter 7 bankruptcy?
Credit Counseling Certificate.
To file bankruptcy, you need to obtain a credit counseling certificate from a credit counseling agency approved by the U.S. Trustee’s Office. The certificate is only good for 180 days. If you are filing jointly with your spouse, you and your spouse must get a separate credit counseling certificate.
Complete and submit the Bankruptcy Forms.
Generally bankruptcy courts publish the required forms you must submit for your Chapter 7 bankruptcy. These forms include the bankruptcy petition, the bankruptcy schedules, the means test comparing your median income to the median income of the same household in the same geographic location, the Statement of Financial Affairs, the statement of intentions, and a complete list of your creditors. These forms require you to list all your debts, liabilities, monthly income and monthly expenses. You are also required to classify your debts. Your secured debt goes on one schedule, the unsecured debt on another and your priority debt gets listed.
Remember that filing for bankruptcy is much more than just filling out forms. You can create a lot of headaches not to mention loosing your assets by acting as your lawyer. Pay a competent bankruptcy lawyer to represent you. You’ll be glad you did.
Pay the Filing Fee.
To file chapter 7, the bankruptcy court currently charges $338 to file your case. You can ask the bankruptcy court to waive the filing fee or to pay it in installments. Each request requires a separate application to the bankruptcy court.
Attend the Meeting of the Creditors.
The bankruptcy code requires you to attend a Meeting of Creditors where the trustee asks questions about your submitted documents and financial affairs. The chapter 7 trustee will review your tax returns, proof of your social security number and government-issued ID to verify your identity. Although creditors could attend this meeting, but they often don’t.
File your Debtor Education Certificate.
Complete and file your financial management course and file it with the court. You are required to submit a financial management certificate after your case is filed.
Automatic Stay and Chapter 7 Bankruptcy
The Automatic stay is a law that prevents creditors from contacting a bankruptcy filer. It also stops almost all collection efforts such as garnishments, creditor lawsuits, collection calls, lien placements, and foreclosures. It is also a significant benefit of chapter 7 bankruptcy. It is an effective tool to stop garnishments and lawsuit. Although it also stops foreclosures, in chapter 7, the mortgagee can remove the automatic stay to foreclose. In essence, filing for a chapter 7 bankruptcy to stop foreclosure is only a temporary solution in a chapter 7 bankruptcy. A plan of reorganization like the one in a chapter 13 bankruptcy is needed if the filer intends to keep the property in foreclosure long term.
Chapter 7 Bankruptcy in Texas
For Texas residents, filing for a Chapter 7 Bankruptcy in Texas has two great benefits. First, the homestead exemption in Texas is for an unlimited dollar amount. This means that your home in Texas is protected from liquidation in a chapter 7 bankruptcy, even if it’s paid off. This unique benefit shared with the State of Florida to my knowledge. Its benefit to Texas residents who own their homestead cannot be underestimated.
The second benefit to filing for a chapter 7 bankruptcy in Texas is that Texas allows the filer to select either the Texas Exemptions or the Federal Exemptions. Texas law allows selecting the exemption law that minimizes the amount of nonexempt property. Of course, every situation is different and it is possible for neither exemption scheme adequately protects the filer. Don’t try to evaluate these options yourself.
Hooman is a 18 year bankruptcy veteran from Georgia. He recently relocated to Texas to aid people on their path to financial recovery. During his time away from the office he finds peace in art, writing,
teaching, and traveling.
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