How Chapter 7 Bankruptcy Effectively Protects You From The Creditors?
Chapter 7 is perhaps the most common type of bankruptcy that individuals can file for after realizing that they are in a financial crisis. People who go for this chapter usually do so due to unemployment or having a large chunk of ongoing expenses that cannot be easily covered by their income.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is often called clean slate or total liquidation because it prompts the individuals to sell everything that they own and use the proceeds in order to pay off their creditor.
Eligibility when Filing for Bankruptcy Chapter 7
Also known as the Chapter 7 Means Test, this determines whether you are qualified to file for Chapter 7 bankruptcy by using a series of questions which are related to your current finances. Typically, to be eligible for Chapter 7, you will have to meet the following criteria:
- You must be an individual or a business entity.
- You must not have filed for bankruptcy and dismissed by the court within the last 180 days prior to filing your petition.
- You must have gone through credit counseling within 180 days before filing the bankruptcy petition.
The Means Test itself calculates whether your current financial situation gives you the right to pursue a clean slate situation. There are two steps to the process:
- First, your median income is compared with people or families who are similar to yours. By similar, this refers to the size of your family as well as the city you happen to be living in. If your income is below the medial level, this immediately qualifies you for a Chapter 7 bankruptcy. If not, however, you will have to proceed to the second step of the Means Test.
- Second, your disposable income is calculated. This simply refers to the amount of cash you have left over after all allowable expenses have been deducted. The allowable expenses are predetermined by the IRS. If the amount totals to less than $6,000 in a span of five years, then this qualifies you for a Chapter 7 Bankruptcy.
- Of course, there are instances when your disposable income is more than $6,000 in which case, other Bankruptcy Chapters may be applied. Typically, a disposable income of around $10,000 could translate to a Chapter 13 filing instead of Chapter 7.
Process for Filing Bankruptcy Chapter 7
Once you have passed the Means Test and submitted through a Credit Counseling session, the next step is to file your petition for Chapter 7 Bankruptcy. This is by far the most complex part of the process, requiring you to fill in form that will be submitted to the court clerk for deliberation.
Having a bankruptcy attorney should be able to make things easier. The presence of a professional ensures that all important forms are duly filled and filed with a significant chance of success. If this is not feasible, however, here is what you should know about the forms which are related to a bankruptcy petition:
- A schedule of the petitioner’s assets and liabilities;
- Schedule of current income and expenses, including the source of income and frequency of receipt;
- A statement of the petitioner’s financial situation;
- All unexpired leases and executor contracts;
- Most recent tax returns as well as all tax returns during the course of the case, provided to the bankruptcy trustee.
All these forms – including the Credit Counseling papers – must be filed together with the petition. The court clerk will accept the papers and provide you with a meeting schedule with the creditors, typically within 40 days of the case being filed.
Tip: the forms will require a complete itemization of your debts, including the creditors and the addresses as well ascontact number of said creditors. This is done so that the court clerk can contact them about the petition for an “automatic stay”. To ensure that all your creditors are properly listed, try asking for a copy of your credit report through all three credit bureaus.
Also note that there are currently applications, programs, and website that can help you with the filing process. These programs are pre-loaded with forms that you just have to fill out and print before passing it to the court clerk.
Problems with the Form
So what happens if there are any problems with the form after giving it to the court clerk? The clerk typically checks for any missing documents and if you are lucky, you will be informed even before the petition is filed in the court. However, there are instances when the form is already accepted and paid for before any problems are caught. If this happens, the court will contact you asking for the completion of the requirements. Make sure to respond as soon as possible because there is usually a time limit for this upon which, your case can be dismissed.
Defining Automatic Stay
Mentioned in the previous paragraph, an “automatic stay” provides the petitioner with some breathing space from the creditors. Upon filing of the petition, the stay prevents creditors from contacting the debtor for claiming what is owed on them. Note though that an automatic stay is not absolute and may only last for a short while, depending on the specific circumstances.
Throughout the process of Bankruptcy Chapter 7, you will be assigned with a trustee who will be in charge of the distribution of the funds. The trustee may be appointed by the government or by your creditors and generally has to communicate with you regarding the procedure of the bankruptcy. It is important to supply the said trustee with the documents he or she asks for in pursuit of the case. In a Chapter 7 case, the trustee is the one responsible for handling the funds and distributing them to the creditors.
Meeting of the Creditors and Discharge
Upon filing of the petition, you will be asked to come back in court for a meeting of the creditors. During the event, the debtor will be asked a series of questions by the creditors regarding finances. Explanations on the effect of the discharge to the debtor’s credit report will also be explained thoroughly so that the latter knows exactly what is in store for them. In a Chapter 7 Bankruptcy Discharge, the bankruptcy information typically remains on the credit report for 10 years. This places the petitioner at a very unstable position when applying for loans.
Being able to successfully file bankruptcy Chapter 7 and receive a discharge from the court follows a release from personal liabilities. The assets are sold and the proceeds are paid to the creditors by the trustee. Chances are, this will not be enough, but this is exactly what the discharge is all about. Upon payment, the debtor is released from all debts and creditors no longer have the right to pursue payment.
Of course, it is important to note that a discharge is subject to many conditions with an extensive scope. That being said, the presence of a legal counsel becomes invaluable, explaining the exact extent of the discharge and what the petitioner should or should not do in the process.
Chapter 7 does not necessarily mean that the debtor will be left with nothing. Under the law, there are some items that are considered exempt and can therefore be kept by the debtor despite the liquidation of his assets. Understand though that this varies from case to case and from one state to another. That being said, it is always a good idea to first understand the rules of your state before pursuing a bankruptcy petition.
Grounds for Not Granting a Discharge
The chances of being dismissed by the court is always present, that is why it is crucial for petitioners to smooth out any problems before they hinder the chance of moving forward. Now, there are several reasons why a discharge will not be granted by the court, but the following are some of the most common reasons why this occurs:
- Not able to provide sufficient records regarding his finances;
- Unable to explain sudden loss of assets that would have been part of the payment;
- Committed a crime that is related to bankruptcy;
- Deliberately and fraudulently destroyed or hid property that would have been part of the state upon completion of the petition;
- Unable to complete the course required by the court regarding financial management;
- Failure to obey an order by the bankruptcy court.
Secured and Unsecured Debts
When it comes to paying liabilities during a bankruptcy case, the trustee usually prioritizes certain debts above others. Unsecured are usually the first ones to be paid followed by secured debts. Secured debts are those that are anchored on specific assets – for example, an auto loan is a secured debt, giving creditors the chance to repossess the item upon the declaration of bankruptcy. Depending on the situation, the creditor may still obtain the asset regardless of the discharge.
In cases like this, the petitioner has two options: allow the creditor to obtain the item or reaffirm the debt. By reaffirming the debt, the debtor is essentially pledging to pay the rest of the unpaid liabilities left over the discharge. This agreement usually requires the presence of a lawyer.
Cost of Filing for Bankruptcy
Filing for Chapter 7 bankruptcy without the aid of a lawyer does not mean you do not have to pay for anything. Some charges will apply, including the following:
- Case filing fee costs $245;
- Miscellaneous and administrative fee costs $75;
- Trustee surcharge costs $15.
Now, it might seem wrong to charge someone who is already filing for bankruptcy, but the court does by allowing payment to be given through installment. Typically, the installments should be paid 120 days after the petition, and no more than 4 installments done. Not being able to pay these fees can result to a dismissal of the case. The court clerk will provide you with a receipt of the payment together with the necessary information for the meeting of the creditors.
On the other hand, hiring a bankruptcy lawyer to help you with the process usually translates to higher expenses, averaging between $1,200 and $1,500.
Filing Chapter 7 for a Married Person
Married couples are free to file a joint petition upon which, both of their financial affairs will be required to present an honest case in court. Couples may also file individually, requiring them to accomplish all the forms by themselves. Note though that there are instances when only one person in a couple files for bankruptcy. If this occurs, the court will still need the income/expense records of the other spouse. This will help determine the financial situation of the household and how this impacts the income/expenses of the filing spouse.
Hiring a Bankruptcy Lawyer
After figuring out the relative cost of pursuing Chapter 7 Bankruptcy with or without a lawyer, most people will go for a DIY process. Understand though that filing a petition does not necessarily translate to an approved petition. A DIY Bankruptcy filing typically has a smaller chance of being granted compared to that of having a lawyer on your side.
Of course, you do not always have to get a paid lawyer to handle your bankruptcy case. There are currently pro bono attorneys who are willing to take on the challenge of your petition. If you do decide to hire one, however, make sure to find a lawyer who specializes on bankruptcy and has sufficient experience to help your case.
Understanding how to file for Bankruptcy Chapter 7 is just the first step towards successfully pushing through with the petition. Keep in mind that there is a deliberation process and that the decisions of the court are not exactly streamlined. For that reason, special rulings may be given based on your finances.
After being declared bankrupt, your next step would be to start building your credit through proper handling of finances. The mandatory financial management courses should become useful at this point, allowing you to slowly but surely build yourself up from ground zero. Understand that the record of bankruptcy usually lasts for 10 years so plan ahead in order to prevent yourself from going through the same route again.
To wrap it up – Chapter 7 Bankruptcy is something you can do alone with the aid of several websites, applications, as well as programs. The process might take longer without the presence of a lawyer, but the results will be infinitely cheaper.