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Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is a liquidation of all the debtor's assets. Anything of value owned by the debtor is sold and the cash is distributed among the creditors. Some items, however, are exempt and cannot be sold. Chapter 7 bankruptcies are frequently referred to as "no asset" cases as most Chapter 7 debtors have nothing that can be sold off to pay creditors.
TIP: Persons without a regular income will generally be required to file under Chapter 7 because a repayment plan under Chapter 13 would be impossible.
Chapter 7 bankruptcies do not include a repayment plan that the debtor must adhere to for many months. Once the assets are liquidated, the bankruptcy is granted, the debts are discharged and the proceedings are finished. A typical Chapter 7 case takes approximately 6 months from start to finish.
TIP: The administrative office of the U.S. courts published an online manual titled "Bankruptcy Basics" for debtors and creditors that can be downloaded at www.uscourts.gov/library/bankbasic.pdf
Chapter 7 bankruptcies make up the majority of individual bankruptcy filings. It is under Chapter 7 bankruptcies that state laws concerning exempt property and homestead exemptions become pivotal.
Some states, such as Nevada, have generous exemption systems that let debtors keep nearly everything they own. In other states, very little property may be exempt. For example, some laws protect only one vehicle, with a value of up to $10,000.
SIDEBAR: Because the consequences of liquidation are so severe in states where little property is exempted, debtors residing in these states must file under Chapter 13 in order to keep their home, vehicles and other property.
I know that I am going to file for bankruptcy this year. Is there anything I need to do financially to prepare?
Yes. The goal is to go into bankruptcy with as few nonexempt assets as possible—that is, assets that can be sold to pay creditors. If you own jewelry or art, you can sell it and use the funds to pay off debts that will not be discharged and which you will always owe, such as child support, alimony and student loans. You can also use funds to purchase exempt property, which would be protected.
TIP: Because transfers, sales and purchases that occur directly before bankruptcy are always looked at suspiciously by the courts, it is important to consult with a lawyer before you begin to convert nonexempt property into exempt property.
Is there a certain time that is better to file for bankruptcy than others?
Yes. One of the most important timing considerations involves determining when you are likely to receive any income tax refunds due to you. If you file before the refund is received, the bankruptcy trustee can claim the funds to pay creditors. Your goal is to collect any money or assets that you have coming to you before you file for bankruptcy.
TIP: Do not file for bankruptcy if you are expecting but have not yet received any of the following:
- insurance proceeds
- lawsuit awards, including money and property received in a divorce settlement
Can I file for bankruptcy myself?
Yes. Debtors often handle their own bankruptcies because the filings are all on standard forms. If you file yourself, then you are representing yourself pro se.
TIP: The bankruptcy petition and schedules that must be attached are standard forms used by all bankruptcy courts. The forms are available at www.uscourts.gov/bkforms/.
TIP: All courts have local rules or procedures for filing in bankruptcy court. Call the bankruptcy court clerk and ask how you can obtain a copy of the local rules. It is possible the rules may be online, as well.
SIDEBAR: The debtor must swear that everything set out in the petition is true and correct when it is filed. There are criminal penalties for giving the court false information.
How do I know in what court I should file my bankruptcy petition?
You file in the federal judicial district where you live. Each state has one or more federal districts with a bankruptcy court. For example, debtors in Dallas, Texas, file in the Northern District of Texas.
SIDEBAR: You must have resided in the district at least 180 days before filing the petition or you will have to use the exemptions of the state you moved from.
I am unable to pay the entire filing fee. Is there any way I can get the fee waived?
Yes. You may be able to fill out and file a pauper's affidavit requesting the court to waive the fees because of your dire financial circumstances. However, it is more likely that the court will require installment payments if you have any means to pay.
TIP: Chapter 7 and 13 bankruptcies cost $299 and $274, respectively, in filing fees. These fees must be paid in addition to your attorney's fees for representing you in court.
I am married and the debts I owe are mine alone. Can I file for bankruptcy without including my husband in the petition?
Yes. However, filing separately is generally not recommended because creditors can look to the spouse who did not file and whose debts were not discharged in bankruptcy for payment.
TIP: In community property states, both spouses are liable for debts incurred by one of them during the marriage. A single bankruptcy filing does not provide a "clean slate" in those cases because the nonfiling spouse is still liable on those same debts.
If my husband and I file jointly, can we both claim exemptions?
Yes. One of the main advantages to joint filing is that exemptions can be doubled. For example, if one vehicle is exempt under your state laws, then you each can claim a vehicle.
Are there federal bankruptcy exemptions that I can choose to use instead of my state exemptions?
It depends. Not all states permit you to use the federal exemptions. Some will allow you to choose between using federal or state exemptions, whereas others require you to use state exemptions only.
SIDEBAR: Currently, the states that permit you to choose between federal and state exemptions are Arkansas, Connecticut, Hawaii, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Washington and Wisconsin.
In almost all cases, state exemptions are much broader than the federal exemptions. For example, the federal exemption protects homesteads up to $18,450 in value only. State exemptions typically exclude homesteads with a much higher value and allow a maximum limit of $125,000 for property acquired during the 1,215-day period before filling for bankruptcy (roughly, during the last 3 years, 4 months).
If I represent myself, will I have to argue before or present evidence to a bankruptcy judge?
No. Unless creditors object and litigation begins, debtors are only required to appear at the creditor's meeting, known as the "341 meeting."
SIDEBAR: The "341 meeting" is an informal meeting between the debtor and the bankruptcy trustee. It is usually held in a conference room at the courthouse. The trustee asks for the debtor's identification and Social Security card, reviews the schedules of expenses, assets and exemptions and confirms with the debtor that the information is true and correct. Sometimes the trustee may ask for an explanation of the circumstances that led to filing bankruptcy.
TIP: The debtor must attend the creditor's meeting or the bankruptcy petition may be dismissed.
TIP: A debtor can request a time extension, or continuance, for the creditor's meeting. You must make the request in writing and state the reasons you cannot attend. The request should be filed with the bankruptcy clerk.
When I file for bankruptcy, will the court send my creditors a copy of my schedules and other documents?
No. The court sends out only a notice that you filed for bankruptcy and reminds creditors that the automatic stay is in place, preventing them from further collection activities.
What are creditors allowed to do once the automatic stay has been issued?
Nothing. Creditors may not communicate with the debtor in any way. Foreclosures, repossessions, garnishments and sheriff's sales must immediately cease until the bankruptcy is over or the court has given permission to continue with collection activity.
What debts are not dischargeable in a bankruptcy?
Student loans, child support and alimony payments typically survive the bankruptcy. The debtor will still owe or be obligated on these debts even though all other debts have been discharged.
TIP: Any debt that is not listed by the debtor in the bankruptcy schedules remains in effect. The debt must be listed in order to be discharged.
Are taxes ever dischargeable?
Yes. Bankruptcy laws allow income taxes to be discharged in specific situations:
- more than 3 years have passed between the due date of the unfiled tax return at issue and the bankruptcy filing;
- more than 2 years have passed between the actual filing of the tax return at issue and the bankruptcy petition; and
- the taxes were assessed at least 240 days before filing for bankruptcy.
TIP: Always consult a board-certified tax attorney with experience in dealing with the IRS if tax issues arise. Bankruptcy attorneys may not be as familiar with the complexities of tax laws.
I want to continue to do business with the credit union. Is there any way I can avoid having my loan from them be discharged in bankruptcy?
Yes. Debtors, with the approval of the court and before discharge, can reaffirm outstanding loans or debts by signing a reaffirmation agreement.
TIP: Do not reaffirm unsecured loans with creditors. Keeping the debt defeats the purpose of filing bankruptcy. Future loans are determined by your credit score, not by the fact that you reaffirmed the debt (which does not improve your credit score).
The adjustable rate mortgage on my home is due to change interest soon. Can I refinance although I just filed bankruptcy?
No. Refinancing your mortgage is giving preference to one creditor over others. You can refinance once the bankruptcy is discharged.
Will I have to wait another 90 days to file bankruptcy if I had to use my credit card for emergency dental work?
No. Charges within 90 days of filing are only a problem if you purchased a luxury or unnecessary item and did not intend to repay. In your case, a medical emergency arose and you had no intent to defraud the dentist when you went to her for dental work. However, an attorney may refuse to file for you until 90 days have passed.
TIP: The 90-day time requirement starts when the purchase is made, not when the bill is received.
Are beer, wine and cigarettes legitimate expenses in a Chapter 7 bankruptcy?
Typically, liquor is not a legitimate expense and will not be allowed. Tobacco products are allowed in some districts; others do not let you add in expenses for cigarettes in calculating your total living expenses.
If I file for bankruptcy, will I get to keep my IRA?
Under the new bankruptcy law, up to $500,000 in IRA accounts is exempt. However, IRA accounts that have been rolled over from qualified plans are protected.
TIP: The bankruptcy law also exempts pension plans, 401(k) plans, and other ERISA-qualified plans.
One of my creditors has asked for relief from the automatic stay. What does this mean?
The creditor, typically a secured creditor, wants his collateral protected and needs relief from the automatic stay to continue to receive payments or repossess the item. For example, the bank that loaned money on a tractor may request relief allowing the debtor to continue to make payments on the note as the tractor's value is decreasing over time. Alternatively, the bank can ask for permission to repossess the tractor if you are behind on your payments.
Can a creditor fight my bankruptcy and try to keep what I owe from being discharged?
Yes. Creditors have the opportunity to object to the bankruptcy by filing a complaint with the court. The creditor can ask to have the entire bankruptcy dismissed or the court to exclude a specific debt. The creditor must have "good cause" to object, such as charges for luxury items on credit cards a few days before filing.
SIDEBAR: Once an objection is filed, an "adversary proceeding" or litigation is initiated. A pro se debtor should hire an attorney immediately if litigation starts.
What are the reasons the court can deny a bankruptcy?
If an objection has been filed, the court can deny the bankruptcy on the basis of the objection. Some bases of objection include:
- transfer or concealment of property with intent to hinder, delay or defraud creditors
- destruction or concealment of books or records
- perjury and other fraudulent acts
- failure to account for the loss of assets
- violation of a court order
- an earlier discharge in a Chapter 7 case within the last 8 years
I filed for bankruptcy. Can I get out of my apartment lease?
Yes. Housing and vehicle leases, plus equipment leases, can be terminated once you file for bankruptcy.
I overlooked some assets when I filed for bankruptcy. Can I add the assets to the schedules I already filed?
Yes. The petition, including the schedules can (and should) be amended to reflect any new information or changes. You can always add assets, expenses or even creditors you failed to list during the first filing.
Can I file for Chapter 7 bankruptcy more than once?
Yes. However, a debtor can only receive a discharge once every 8 years.