Chapter 7 Bankruptcy
Chapter 7 bankruptcy or “straight bankruptcy” is also known as “liquidation”. This is a way for people to pay off most of their debts and “start over” so to speak. The concept is simple. The debtor’s assets are sold and the revenue goes to pay off creditors to settle the outstanding debt. The negative consequences involve loss of property and a significant reduction in one’s credit score rating. In 2005, chapter 7 bankruptcy eligibility requirements became more stringent. Though it is a little more difficult to undergo chapter 7, it is still widely used to settle substantial outstanding debt. For more information about chapter 7 bankruptcy eligibility requirements and “means testing”, read on! It is always a good idea to hire a bankruptcy lawyer rather than trying to do it yourself.
Ch. 7 Bankruptcy Petition and Filing Requirements
In order to begin the process of declaring chapter 7 bankruptcy, the debtor must file a petition with the bankruptcy court. These courts are geographically based, so look locally for this information. In addition to filing a petition, the debtor must also file the following:
- Current liabilities and assets
- Current expenditures and income
- Statement of financial affairs
- Executory contracts and/or unexpired leases
- Copy of tax return or transcripts for most recent tax year
- Tax returns filed during the case
If you are an individual with mostly consumer debts, you may also have to file the following documents:
- Certificate of credit counseling
- Debt repayment plan from credit counseling
- Evidence of payment from employers (60 days before filing)
- Monthly net income statement
- Statement of any anticipated increase in expenses or income after filing
- Record of interest that the debtor has in state or federal education or tuition accounts
In order to complete the required eligibility paperwork, the debtor must provide this information:
- List of all creditors, amounts owed and nature of the claim
- Documented proof of the debtor’s source, amount and frequency of income
- List of debtor’s property
- List of the debtor’s living expenses
Married people are obligated to obtain this information about their spouse regardless of whether they are filing for a joint petition or individual petitions. Failure to do so will result in a prolonging of the case until the household’s financial position can be established.
Automatic stay means that most collection actions will stop after filing for chapter 7 bankruptcy. Certain types of collection actions in the Bankruptcy Code will not be stopped due to automatic stay. Sometimes the automatic stay will only be in effect for a short period of time. This halt of collection actions means that creditors won’t be able to initiate or continue lawsuits, wage garnishment, or debt collection phone calls. The debtor provides the names and addresses of all their creditors who are informed by the bankruptcy clerk that a bankruptcy is taking place and therefore collection calls are not appropriate.
Typically between 20 to 40 days of filing, the case trustee holds a meeting of creditors. During the meeting, the debtor is put under oath and questioned. The debtor must attend and truthfully answer the questions of the trustee and creditors. If filing jointly, both spouses must be in attendance during the creditor meeting. Bankruptcy code mandates that the debtor must provide the trustee with any financial documentation requested. Trustees are also required to ask the debtor if they are aware of the negative repercussions that filing for chapter 7 bankruptcy will have on their financial livelihood. These repercussions include but are not limited to: effect of reaffirming debt, effect of receiving a discharge, effect on credit history, and the ability to file a petition under a different chapter. Many trustees will provide document ion prior to this meeting so that debtor is aware of these items beforehand.
Fees and Payment Options
It is important to understand the fees involving in filing for chapter 7 because failure to do so may result in the dismissal of your case. A minimum of $220 is required as a “case filing fee”. Typically, this fee is paid upon filing for bankruptcy. Individuals can pay in installments if allowed by the court. In addition, there is typically an administrative and trustee fee that are less than $50 a piece. If the debtor’s income is meets certain requirements, the courts can waive the fees typically required.
Chapter 7 Bankruptcy Exemptions
Many people mistakenly assume that filing for chapter 7 bankruptcy will result in the sale of their home, property, and/or vehicle. Although chapter 7 bankruptcy is designed to give the debtor a “fresh start”, it does not mean that the debtor has to relinquish 100% of their property. Many people are able to hold onto their homes, vehicles, and even property after filing for chapter 7.
Chapter 7 bankruptcy is also known as liquidation because essentially the debtor’s assets are sold to pay outstanding debts before the remainder of the debt is “discharged” or “forgiven”. Bankruptcy law protects certain types of property from being sold in order to pay creditors. These protections are known as “exemptions”. These exemptions do have limits, so it is possible that your home or property is only partially protected by exemptions.
Exemptions vary from state to state so it is imperative that the debtor be well informed about the state and federal laws relevant to chapter 7 bankruptcy exemptions. Here are some of the most common types of exemptions:
- Homestead – The most commonly sought-after exemption is for the home of the debtor. Luckily, there are robust exemptions in place that greatly improve the debtors chances of having the option to remain in their own home. Limitations on this exemption include federal and state limits which vary substantially. Federal homestead exemptions are limited to approximately $20,000.
- Vehicle – Many people rely on their own transportation for income, so vehicles also commonly fall under exemptions, or protected status when filing for chapter 7 bankruptcy. There are state and federal limitations to the amount of protected money derived from a vehicle’s value. For example, in 2010 the federal vehicle exemption was maxed at about $3,000.
- Personal Property – A large range of exemptions protect the debtor’s personal property. Items such as jewelry, furniture, clothing, home appliances and many more are included in personal property exemptions. Per item and total limits may exist for this category of exemptions.
- Wildcards – Property that does not fall into the aforementioned categories may fall under “wildcard exemptions”. These exemptions are almost always limited in value, but can be a good way to protect additional property from being liquidated in order to pay creditors.
What can NOT be discharged under Chapter 7 bankruptcy?
The following cannot be discharged under Chapter 7 bankruptcy
- Governmentnded student loans
- Certain forms of tax debt
- Federal tax liens
- Child support
- Alimony/ spousal support
- Debts for personal injury or death caused by debtor’s operation of a motor vehicle
- Fines and penalties for violating the law
- Certain tax- advantaged retirement plans
- Cooperative housing fees
Can tax debt ever be discharged through Chapter 7 bankruptcy?
Tax debt can be discharged under Chapter 7 bankruptcy if the following conditions are met:
- The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You did not commit tax fraud or willful tax evasion.
- Your tax debt is at least three years old.
- You filed a tax return.
- The income tax debt was assessed by the IRS at least 240 days before you filed your bankruptcy petition, or has not yet been assessed.
Can student loans ever be discharged through Chapter 7 bankruptcy?
Although rare, private student loans can sometimes be discharged. In order for this to happen you must show that paying your student loans would impose “undue hardship” on you and your dependents, and also show that you cannot make payments now or in the future.
Will the IRS audit me after Chapter 7 bankruptcy is filed?
The IRS usually audits people who do not file their tax forms, do not pay their taxes, or submit inaccurate or fraudulent information. The IRS do not pay any more attention to someone who has filed for bankruptcy versus someone who has not. It would also be impractical for the IRS to audit everyone who has filed for bankruptcy simply because too many people enter bankruptcy yearly.
My ex-spouse, who pays me child support, is filing for bankruptcy. Can he get out of his child support obligations through Chapter 7 bankruptcy?
“Priority debts” are debts considered too important to discharge. Child support is one of these debts and must still be paid even after filing for bankruptcy.
After bankruptcy and taking care of a lot of debt, credit reports still report debt as unpaid. How can I fix this?
You can clean up your credit report with the credit bureau by asking them to re-investigate your debts. You can do this via a form or sending them a writing them directly. If you write to them directly, include all of the inaccurate information that needs to be updated and request that they investigate. If their investigation still reports inaccuracies you can contact the creditors directly and have them verify in writing that your debts have been satisfied.