What Is Chapter 7 Bankruptcy?
Filing for Chapter 7 bankruptcy gives you immediate protection from creditor harassment, collections activity, collections calls, wage garnishment, bank levies, and can even stop a pending home foreclosure or car repossession. The end result of a successful Chapter 7 bankruptcy is a discharge – which is a court order that eliminates most legally binding debts such as credit cards, hospital bills and medical bills, repo deficiency balances, and even certain tax debts. This discharge allows you to have a fresh start and new beginning for your financial life.
WHY FILE FOR CHAPTER 7 BANKRUPTCY RELIEF?
The simple answer: to stop debt collection calls, harassment, lawsuits, judgments, bank levies, and wage garnishments by getting rid of your debts. When your bankruptcy case is filed, your creditors will be legally prohibited from taking collection action against you. The phone calls stop, the harassment stops, debt collection lawsuits have to stop, bank levies and wage garnishments have to stop, and most of your creditors will have to submit to the bankruptcy court’s resolution of your debts.
When your family suffers a financial loss (be it through illness, loss of income, death of a family member, divorce) and payment of your debt overwhelms all other aspects of your life and totally consumes your budget, bankruptcy can help you gain control over your finances and give you a fresh start.
WHEN SHOULD I FILE FOR CHAPTER 7 BANKRUPTCY RELIEF?
That will depend on the facts of your situation. Some people will file for bankruptcy before they have even stopped paying on their debts because they know their financial situation is not repairable. Some wait to see if their financial situation will improve, and when it does not in a reasonable period of time, they file. Some people are forced to file bankruptcy when wage garnishments or bank levies take money they need for their daily living.
If you think you may have to file bankruptcy, we would really prefer to talk to you early in your decision-making process. We would rather spend time advising you early in your debt resolution process and have you avoid bankruptcy than have you guess what to do on your own and make decisions that have negative consequences for you later. In our initial meeting, we will review your situation with you and advise you whether Chapter 7 bankruptcy is a good option for you and if so, when is the right time for you to file.
There are some situations in which you will want to seek our advice ASAP:
If you have been sued by a creditor (you have received a Summons & Complaint), you must act quickly to stop the lawsuit from proceeding.
If you have received a garnishment exemption notice, or been notified of a wage garnishment or bank levy you must act quickly to prevent your wages from being garnished or to stop a bank levy.
If you have received notice of a foreclosure on your home or other real estate, you must act quickly to stop the foreclosure from happening.
If you have received a notice of intent to repossess your vehicle, you must act quickly to stop the repossession from happening.
WHAT DEBTS CAN BE DISCHARGED IN A CHAPTER 7 BANKRUPTCY?
Most unsecured debts like credit cards, medical bills, hospital bills, and deficiency balances from a car repossession or home foreclosure can be discharged in a Chapter 7 bankruptcy. Certain tax debts can also be discharged in a Chapter 7 bankruptcy, if a number of conditions are met. Although rare, there are some situations in which a creditor can object to the discharge of a debt. We can review your debts to assess whether an objection is likely.
WHAT DEBTS CANNOT BE DISCHARGED IN A CHAPTER 7 BANKRUPTCY?
- Student loans
- Child support
- Spousal maintenance (alimony)
- Marital dissolution property settlements
- Sales, property, and withholding taxes
- Income taxes that are less than 3 years old or that do not meet other discharge requirements
- Debts for crimes
- Debt incurred through fraud
DO I QUALIFY TO FILE FOR CHAPTER 7 BANKRUPTCY RELIEF?
If you have not filed a Chapter 7 bankruptcy in the last 8 years or filed a Chapter 13 in the past 6 years, you pass the Means Test (a technical calculation based on your household’s last 6 full months of gross income, and using certain IRS standard expense deductions), and your real budget is neutral or negative after you pay your normal living expenses, then you will qualify to file for Chapter 7 bankruptcy relief. If you are under the median income you will almost always qualify to file a Chapter 7 bankruptcy.
DO I LOSE ASSETS WHEN I FILE FOR CHAPTER 7 BANKRUPTCY?
Most individuals (about 95%) do not lose assets when they file for Chapter 7 bankruptcy as they can use exemptions to protect their assets. We will review your assets with you so that we can determine what assets are protected and what assets, if any, are not protected.
WHAT HAPPENS IF I CANNOT PROTECT AN ASSET?
Assets that are not exempt can be sold by the bankruptcy trustee and the proceeds used to pay the trustee’s fees and the creditors claims. This does not happen in many cases, and we carefully go over your case with you so you understand if this may be an issue. The trustee will often ask the debtor if they want to purchase and keep a nonexempt asset rather than have the asset sold to someone else. The value the trustee asks for is usually the value that the debtor placed on the asset when the case was filed. If the debtor cannot pay the amount or refuses to pay, then the asset is sold by the trustee, often at auction.
WHAT IS THE PROCESS I GO THROUGH WHEN I FILE A CHAPTER 7 CASE?
Your Chapter 7 case is filed when all the necessary documents are gathered, fees are paid, and you have signed the petition, schedules, and statements. Within a week after your case is filed, the bankruptcy court mails you out a notice with your case number and information on a meeting you must attend. This meeting is called the section 341 meeting of creditors but creditors seldom attend this hearing. It is an administrative hearing involving an attorney called the Trustee, you, and your attorney, so no judges are present. At the meeting, the Trustee verifies your identity, swears you in, and verifies that your petition, schedules, and statements are true and correct, and reviews your assets. It is an open hearing and there are typically about six hearings scheduled per half hour. That hearing itself usually takes about 5 minutes, and you will have an attorney by your side at this meeting. Your debts are scheduled to be discharged about 61 days after the meeting of creditors is concluded.
ARE THERE TAX CONSEQUENCES TO DISCHARGING DEBT IN CHAPTER 7 BANKRUPTCY?
Debt discharged in bankruptcy is not taxable income. However, debt forgiven by a creditor when a bankruptcy has not been filed is taxable income. In some cases it may be preferable to file bankruptcy rather than have debt forgiven by a creditor because the debt forgiveness can create a tax liability.