Chapter 7 bankruptcy - Discharge your debts legally
Table of contents
- Chapter 7 Bankruptcy costs & timeline
- Chapter 7 bankruptcy timeline
- Filing Eligibility
- Bankruptcy Forms
- Automatic stay - The magic wand
- Role of the bankruptcy trustee
- Creditors Meeting
- What happens to your property
- How secured debts are treated
- Chapter 7 bankruptcy discharge
- Advantages of chapter 7 bankruptcy
- The 2005 amendment to federal bankruptcy law
- US State Bankruptcy Laws
Chapter 7 of Title 11 of the United States Bankruptcy Code governs the process of liquidation under U.S. Bankruptcy Laws. Chapter 7 is the most widely filed form of bankruptcy in the US.
In a Chapter 7 bankruptcy, the court appointed trustee may cancel many or all of your debts. However, they can also sell (liquidate) some of your assets to make payments to your creditors. Below is an outline of Chapter 7 - the eligibility criteria, the various forms you must fill out, the complete filing procedure, and, most importantly, the amendment to US bankruptcy law passed in 2005.
Chapter 7 bankruptcy costs & timeline
Filing for Chapter 7 bankruptcy is relatively inexpensive. The entire process takes around 3 to 4 months, with filing and administrative fees of $335. There are a few other costs associated with filing Chapter 7, including possible fees like appraisal fees, title search charges, required pre-filing credit counseling, and a post-filing course on financial management.
The bankruptcy trustee charges a fee for monitoring your case that may range between $15 and $20, which may increase the cost to file Chapter 7. If you can’t afford the cost of filing Chapter 7, then you can ask the court to allow you to pay the filing fee in installments.
Chapter 7 bankruptcy timeline
- Submit bankruptcy petition to the court.
Pay the bankruptcy filing fees
Submit your credit counseling certificate, schedules, and other required papers
- Submit your income tax returns to the IRS, if necessary
- Attend the 341 creditors meeting
File a Statement of Intention if you have not yet done so
- The last date to file a Statement of Intention
- Submit Reaffirmation Agreements
Receive your bankruptcy discharge
You can qualify for chapter 7 bankruptcy when:
- You have very low or no disposable income
- Your monthly income is less than the state median income
- You have consumer debts
- You have completed credit counseling and a financial management course
You won’t be able to file for chapter 7 bankruptcy if:
- You have already received a bankruptcy discharge in the last six to eight years, depending on the type of bankruptcy you filed.
- A previous chapter 7 or chapter 13 case was dismissed within the past 180 days
- You have enough income to feasibly satisfy a Chapter 13 plan
- The bankruptcy court finds that you have tried to cheat your creditors or concealed your assets
In order to file chapter 7 bankruptcy, you need to fill out a petition and a number of other forms. The forms basically ask you to describe:
- Your property
- Your present monthly income and expenses
- Your present debts
- Your exempt property
- Property that you owned and money that you spent during the last two years, and
- Property you sold or handed over during the last two years
Automatic stay - the magic wand
If you file chapter 7 bankruptcy, it immediately puts into effect an Order for Relief—informally known as the automatic stay. Once you file for chapter 7, this automatic stay immediately stops all collection activities on the accounts. So for the time being (until the judgment is made), creditors cannot garnish your wages, empty your savings account, or go after your house, car or other property.
Role of the bankruptcy trustee
In chapter 7 bankruptcy cases, the bankruptcy court exercises its complete authority over its cases through a person called the 'bankruptcy trustee'. A bankruptcy trustee’s primary duty is to make sure that your creditors’ interests are protected. The trustee works hard to pay back the creditors as much as possible by liquidating your assets. The more assets the trustee recovers from you, the more the trustee is paid.
The bankruptcy trustee will examine your papers to make sure nothing is wrong with them, and look for nonexempt property to sell for the purposes of paying off your creditors. The trustee also goes through your financial records from the previous several years, so as to free up assets to liquidate and pay your creditors.
One or two weeks after you file, you and your creditors will receive a notice from the bankruptcy court stating that a creditors’ meeting has been scheduled. The bankruptcy trustee conducts the meeting, and, once you swear in, may ask you questions regarding your assets and the papers you have filed. For the meeting, the trustee may ask you to bring things like copies of your mortgage papers, car titles, latest bank statements, property deeds, tax returns and paychecks. In the vast majority of chapter 7 bankruptcy cases, this is perhaps the only visit to the courthouse that a debtor has to make.
What happens to your property
If the bankruptcy trustee determines that you have some nonexempt property, you are required to either yield that property or provide the trustee with its equal value in cash. However, if the value of the property is not enough to pay off the debt, or is troublesome for the trustee to sell, the trustee may abandon the property. This means that even though the property is nonexempt, you can keep it.
The list of exempt and nonexempt property varies from state to state. You can find out the details of exempt and nonexempt property in the bankruptcy laws of your state.
How secured debts are treated
If you have secured debt, which are debts you incurred by providing collateral, and if you are behind on your bills, the creditor may ask the court to raise the automatic stay in order to repossess or foreclose on your property. On the other hand, if you are paying your bills on time, you can keep your property and go on making the payments as before.
Again, if a creditor has imposed a lien on your property on an unpaid debt, the debt will be considered secured. However, if you file for chapter 7, you may be able to remove the lien.
Chapter 7 Bankruptcy Discharge
Once you've finished all the required steps in the bankruptcy process, the court will wipe out your debt, except:
- Debts that can’t be discharged in bankruptcy, such as child support, most tax debts, and student loans, unless the court determines otherwise,
- Debts that the court declares nondischargeable because of protest from the creditor’s end. This usually applies only to debt incurred as a result of some form of fraud or scam.
Advantages of Chapter 7 bankruptcy
Read on to find out the advantages associated with filing chapter 7 bankruptcy:
- 1 It's a shorter process than other forms of bankruptcy: The exact amount of time depends on the state in which the bankruptcy is filed and your individual financial condition.
- 2 It doesn't include future income: Chapter 7 effectively doesn't include your future income. In this case, the court is more concerned with what you've earned in the six months prior to filing bankruptcy. The income you receive going forward after your bankruptcy case is technically not a part of what you call the bankruptcy estate.
- 3 The legal fees are lower: Even with an attorney, it doesn't cost an exorbitant amount.
- 4 No payments or paperwork: This is perhaps one of the greatest advantages of filing chapter 7: there's no payment involved, and not much paperwork. This makes the entire process far less troublesome.
- 5 Quicker recovery: It's generally thought that recovery from chapter 7 is far quicker than from any other form of bankruptcy. This makes the aftermath of the process far easier to deal with.
The 2005 amendment to federal bankruptcy law
On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) came into effect - the biggest amendment to the US Bankruptcy Code since 1978. One of the major stated purposes of this amendment was to prevent abuses of bankruptcy laws. These are some of the new requirements that came into effect as the result of BAPCPA.
Debtors filing for chapter 7 bankruptcy are now required to fill out the Official Bankruptcy Form, 22A. This form is specifically meant to means test debtors eligibility to file bankruptcy, by requiring them to disclose their monthly income and expenses.
The means test is used to determine whether or not your income is low enough for you to file chapter 7 bankruptcy. The means test is essentially a formula designed to keep filers above a certain income level from filing chapter 7 bankruptcy. This doesn’t mean that you have to be broke in order to qualify for chapter 7. You can have significant monthly income and still pass the means test if you have high expenses, such as huge mortgage payments.
Eligibility to file is another section of the law that BAPCPA changed drastically. In the changed legislation, no debtor is eligible to file for chapter 7 unless the debtor receives an individual or group briefing from a nonprofit credit counseling agency approved by the US Department of Justice within 180 days of filing. The debtor should also complete an instructional course concerning personal financial management. Not doing this may compromise the bankruptcy.
Good news! You can.
Usually, filing chapter 7 involves three steps.
- Step 1: Filling out bankruptcy forms
- Step 2: Submitting them to the court
- Step 3: Attending the 341 meeting
You can do the first 2 steps online, but you have to attend the 341 meeting in person. It’s best to consult an attorney before you file for chapter 7 bankruptcy online, because an experienced bankruptcy attorney will know the steps and laws.
A chapter 7 bankruptcy attorney charges a fee that typically ranges from $1500 to $3000. That’s on top of the chapter 7 cost. This is why many people want to file on their own—it appears to keep costs down. But it’s not always a wise idea. Chapter 7 bankruptcies filed by attorneys have a success rate of 95%. Self-filers’ rates are much lower: they’re dismissed at a rate four times higher than cases filed by attorneys.
Filing bankruptcy with a chapter 7 attorney has many other advantages over self filing, or pro se bankruptcy. Here are a few of them:
- An attorney can explain different types of bankruptcy, and give you a preliminary idea of which type is best for your circumstance.
- The attorney can tell you if declaring bankruptcy chapter 7 is your best option.
- They can tell you your state’s chapter 7 bankruptcy laws so that you don’t make any mistakes.
- They can help you understand the chapter 7 eligibility criteria clearly.
- They can help you properly apply the means test.
- They can help you to understand the correct value of your assets.
- They can explain how to use state and federal exemption rules to protect your assets.
- They can help you understand which debts can or can’t be discharged in bankruptcy.
- They can help you fill out the forms and complete the paperwork necessary to file for chapter 7 bankruptcy protection.
- After filing for chapter 7 bankruptcy, an automatic stay is immediately imposed. If creditors violate the automatic stay, your attorney can help you take legal steps against them.
- If you are considering filing chapter 13 after filing chapter 7, your attorney can help you to make an informed decision about your options.
- They can explain the alternatives to filing for chapter 7 bankruptcy protection.
- Check your local legal aid offices. You may be able to get free legal advice on the matter from there, although wait times can be long.
- Contact the National Association of Consumer Bankruptcy Attorneys (NACBA), which is a bankruptcy attorney hub.
- Contact your state’s bar association and ask for a referral to a local chapter 7 bankruptcy attorney.
- Browse through the online lawyer directories.
Yes. Chapter 7 bankruptcy laws allow you to file bankruptcy without your spouse. However, it may have affect your spouse, depending on:
- Whether or not you have joint assets or debts with your spouse
- The property and bankruptcy laws in your state
- Whether you’re filing chapter 7 or chapter 13 bankruptcy
If you file bankruptcy without your spouse, remember that discharged joint debts will be reported on your spouse’s credit report as well as yours. Also, creditors can still come after your spouse for payments since the automatic stay will not be imposed on them, because they are not under chapter 7 bankruptcy protection.
Occasionally, a chapter 7 bankruptcy petition is dismissed. A dismissed bankruptcy is a failed bankruptcy: you will not succeed in acquiring bankruptcy protection if your petition is dismissed. Here are some circumstances where that can happen:
- You have committed bankruptcy fraud
- You don’t pass the means test
- You don’t complete the compulsory education course
- You don’t pay your chapter seven bankruptcy filing fees
- You don’t submit the necessary bankruptcy forms and documents
- You don’t attend the 341 meeting