Chapter 7, otherwise known as “liquidation” or “straight bankruptcy” is generally the simplest and quickest and is available to individuals, married couples, corporations and partnerships. A trustee appointed by the court gathers and sells your nonexempt property. The proceeds from the sale pay your creditors. You’re able to keep any “exempt” property.
Exempt Property
When determining what is considered exempt, many states allow you to use the state’s definition of exempt or the federal list of exempt property. Some states require to use the state’s list. Be sure to check your state’s laws to find out what applies to your state.
Exempt property could consist of the following (see the list and code for your state for details):
- Real estate such as a residence
- Trade or professional tools, books,
- Unmatured life insurance contract
- Prescription health aids
- Social security, veteran’s benefit, disability, illness or unemployment benefit
- Proceeds from a judgment
Beginning October 17, 2005, under the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), you now also have more time to decide whether to use the state of federal exempt property lists. This was to prevent someone from moving to a different state with more generous exemptions.
Most chapter 7 cases are “no-asset” cases, which means that you don’t have nonexempt property for the trustee to sell. When you file your petition for bankruptcy, you declare whether your case is “asset” or “no-asset.” The burden is on the trustee to change the designation.
Eligibility for Chapter 7
If you file, under BAPCPA, you must undergo a “means test” to qualify for Chapter 7 bankruptcy. This is how the IRS determines who can or can’t file. Your income and expenses are examined to see how they compare to the standard for your area as set by the IRS.
For example, if you earn less than the median income for a family of your size in your state, you can file for Chapter 7 bankruptcy. However, if your income from the last six months is greater than the median income, and you can pay at least $6,000 over five years or $100 a month, toward your debt you can’t file for Chapter 7. You must file for Chapter 13 instead.
The means testing requires you pay any overdue tax returns withing weeks of filing bankruptcy.
Now, you must also pay for credit counseling and budget analysis at your own expense. This will address the means testing calculations for you. These calculators can also be found on the Internet.
Filing Chapter 7
Bankruptcy starts with filing an official petition, schedules and Statement of Financial Affairs in bankruptcy court. You must provide:
- A full list of creditors
- The amount and type of their claim, the source, amount and frequency of your income
- A list of all your property
- A detailed list of monthly living expenses
As soon as you file for bankruptcy, creditors are prevented from trying to collect on your debts through an “automatic stay.” The stay preserves your property and gives you a break from being sued.
Creditors must show the bankruptcy judge there is cause to continue with collection action. For instance, by showing the property might deteriorate in value during the bankruptcy period.
If there is nonexempt property, the trustee will control of it. That person will sell the property and pay administration fees and then pay any remaining money to creditors with active and approved claim. These will be paid in a level of priority. Any wages earned after filing, you keep and are beyond the reach of creditors prior to the filing date.
341 Hearing
Twenty to 40 days after filing your petition, the trustee holds a “first meeting of creditors,” called a “341″ meeting. You must be present. You’ll be asked questions by the trustee under oath about your property and debts. Creditors can also question you, but seldom do.
The only responsibility you have after the 341 meeting is cooperating with trust and providing any information.
Creditors have 60 days after the meeting to convince the bankruptcy court they should be paid and shouldn’t be “discharged.”
You can also be approached about “reaffirmation” of debts. This is an agreement between you and the creditor that you’ll pay the remaining portion of the debt to keep certain property, even if their debt is being discharged. This could prevent an automobile from being sold instead.
Under the old bankruptcy law, you could make car payments when they became due. When the loan was fully paid, title to the car would be transferred to you. If you defaulted on the loan after discharge, the creditor could repossess the car, but the repossession deficiency amount that you owed would still be wiped out and you would owe nothing.
Under the new law, you have to declare again your dedication to your car loan within 45 days after the “341 meeting.” You can no longer continue to make car payments without reaffirming the loan. If you default on your payments after the loan is reaffirmed and the car is repossessed, you are liable for the repossession deficiency.
There is also an option to purchase the car within 45 days of the “341 meeting.” This means that you have to pay the entire balance that is due within that time period. Because most debtors do not have that kind of money, this option is rarely used.
Reaffirming Debts
If you decide to reaffirm a debt, you must file an agreement with the court. The agreement has to disclose:
- your income and expenses so that the court can see that there is sufficient money to pay the reaffirmed debt
- that you were advised of the amount of the debt you are reaffirming
- how the debt was calculated and;
- that you are aware that the debt will not be discharged
Unless you are represented by an attorney, the court must approve the agreement. A hearing will be held if the court disapproves.
If an attorney represents you, he or she must certify in writing that they advised you of the legal consequences of the agreement, you were fully informed and entered into the agreement voluntarily, and that the reaffirmation will not create an undue hardship on you and your family.
Unsecured creditors (i.e. creditors that lend money without obtaining assets as collateral) may offer deals for new credit based on reaffirming the existing balance on your credit card.
The trustee may review your income and expenses to see if you have enough money left after your current living expenses to pay something to creditors.
Discharge
If creditors haven’t persisted in trying to get money from you and the trustee within 60 days of the 341 meeting, your debts that existed before the filing date will be “discharged” or canceled.
