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Chapter 7 Bankruptcy FAQs:
1. What is a Chapter 7 bankruptcy?
2. Who are the best candidates for Chapter 7?
3. Are you eligible to file Chapter 7 Bankruptcy?
4. What are the benefits of Chapter 7?
5. Does Chapter 7 allow you to keep any property?
6. How does Chapter 7 work?
7. What are Chapter 7 filing fees?
8. What is a discharge in Chapter 7?
9. What are non-dischargeable debts in Chapter 7?
10. Can a Chapter 7 discharge be revoked?
1. What is a chapter 7 bankruptcy?
One of the main purposes of bankruptcy law is to give a person, who is hopelessly burdened with debt, a fresh start by wiping out his or her debts.
Under the federal bankruptcy statute, a discharge is a release of the debtor from liability for certain debts. The debtor is no longer required by law to pay any debts that are discharged. The discharge operates as a permanent order directed to the creditors of the debtor that they refrain from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts. However, a secured creditor may enforce the lien to recover the property secured by the lien.
If you have no realistic ability to repay your creditors in the foreseeable future, it is likely a Chapter 7 Bankruptcy will help you eliminate your debt and provide a fresh financial start. If you do have some ability to repay all or some of your debt, then a Chapter 13 Bankruptcy could help by setting up a reasonable payment plan that you can afford. This is especially helpful if you have a pending foreclosure or auto repossession.
2. Who are the best candidates for Chapter 7?
Best candidates for Chapter 7 would be those who:
- Have lots of unsecured debt. Unsecured debt includes debt related to: credit cards, medical bills, utility bills, personal loans and many judgements for money.
- Do not own much property. Chapter 7 property protection vary according to state laws, but, generally speaking, Chapter 7 offers less protection for your property than Chapter 13 bankruptcy.
- Do not have much income. In order to qualify for Chapter 7 bankruptcy, you must meet certain income requirements. A local bankruptcy lawyer can look at your finances and state bankruptcy laws and let you know if you qualify.
3. Are you eligible to file Chapter 7 Bankruptcy?
Chapter 7 bankruptcy can erase your unsecured debts if you meet certain requirements laid out by the bankruptcy courts: means test, credit counseling and debtor education.
Means test, a formula created by the government in 2005, determines whether you'll be eligible to file for Chapter 7 bankruptcy protection. It is mainly based on your income and expenditures, in other words, your ability to repay the debts.
By law, everyone must receive credit counseling within 180 days before filing from an approved credit counseling agency. You can complete the requirement online or over the phone.
Everyone must also complete a debtor education course before they receive their Chapter 7 debt discharge.
4. What are the benefits of Chapter 7?
When a person files for relief, in most cases they receive protection from creditors through a special court order known as the bankruptcy automatic stay.
The Automatic stay may stop foreclosure, repossession, lawsuits, creditor harassment and wage garnishments. Some recent wage garnishments can even be returned to you.
Chapter 7 may wipe out almost all of your unsecured debts, like credit card debts and any other debts that are not secured by a lien on a property. Creditors' judgments for money obtained against you in court that do not create a lien over your property can be discharged just like all other unsecured debts.
Under special circumstances chapter 7 could allow you to avoid paying older than 3 years tax debts to IRS, as well as reduce the penalties or interest on current tax obligation and extend a period of the repayment.
It will help you prevent termination of utility service or restore service if it has already been terminated. Monthly payments on some debts, including the secured debts like car loans may also be lowered.
You will not have to pay income taxes on a cancelled debt that was discharged through bankruptcy (a cancelled debt is usually treated as income and should be included in your tax return, however in bankruptcy there will be no tax due on such debt).
5. Does Chapter 7 allow you to keep any property?
If the property is exempt, it cannot be used to pay off your debts-unless you owed spousal or child support when you filed for bankruptcy. To claim exemptions, you must have lived in California for at least two years 180 days before filing for bankruptcy. (Otherwise, you would have to use the exemptions available in the state where you used to live.)
Exempt Property
Certain types of property are exempt, meaning that the debtor can keep that property. Exempt property includes:
• Motor vehicles, up to a certain value
• Reasonably necessary clothing
• Reasonably necessary household goods and furnishings
• Household appliances
• Jewelry, up to a certain value
• Pensions
• A portion of the 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
• Even money in your bank account up to a certain amount can be exempt
6. How does Chapter 7 work?
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court in the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets.
In addition to the petition, the debtor must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases.
Debtors must also provide the trustee with a copy of the tax returns. Individual debtors with primarily consumer debts also must file: a certificate of credit counseling ; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition.
In order to complete the Official Bankruptcy Forms the debtor must provide the following information:
- A list of all creditors and the amount and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e., food, clothing,
shelter, utilities, taxes, transportation, medicine, etc.
Married individuals must gather this information for their spouse even if only one spouse is filing, because the court, the trustee and creditors need to evaluate the household's financial position.
7. What are Chapter 7 filing fees?
The filing fee of Chapter 7 is $299; Chapter 13 - $274.
Reopening of chapter 7 is $260; Chapter 13 - $235.
Conversion of Chapter 7 to Chapter 13 - None; Chapter 13 to Chapter 7 - $25.
Normally, the fees must be paid to the clerk of the court upon filing. With the court's permission, individual debtors may pay in installments. If the debtor's income is less than 150% of the poverty level and the debtor is unable to pay the chapter 7 fees in installments, the court may waive the requirement that the fees be paid.
8. What is a discharge in Chapter 7?
A "discharge" in bankruptcy means that you are legally free and clear of any obligation to repay certain debts; they are gone. The creditor no longer has any right to collect that debt. The debtor no longer has any obligation to repay it.
Discharge is received in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge in 60 to 90 days after the date first set for the meeting of creditors.
Secured creditors may retain some rights to seize property securing a debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as a car), he or she may decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the debtor continues to pay the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered.
9. What are non-dischargeable debts in Chapter 7?
Debts that can not be discharged include debts for alimony and child support, certain taxes, debts originating from educational loans made or guaranteed by a government, debts for willful injury by the debtor, debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders, debts you incurred after the bankruptcy case was started.
Bankruptcy will not protect the cosigners on your debts.
10. Can a Chapter 7 discharge be revoked?
The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud by the debtor, if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee, or if the debtor (without a satisfactory explanation) makes a material misstatement or fails to provide documents or other information in connection with an audit of the debtor's case.
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