What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a federal law that has empowered millions of people to rid themselves of many kinds of debts, including credit card debts, medical debts, personal guarantees, car loans, mortgages, and many other debts. Chapter 7 bankruptcy is best for people, or married couples, who have more debt then they can pay back, who don’t have too many assets to protect from liquidation, and who don’t need to pay back certain debts like mortgage or car note arrears.
How Does Chapter 7 Work?
BANKRUPCTY PETITION
To file Chapter 7 bankruptcy, you must file paperwork with a Bankruptcy Court explaining what assets you own, what income you make each month, how much you spend each month, and a number of other questions about your finances. You’ll need to refer to certain documents when completing this paperwork, including your income proofs, if any, your tax returns, and your bank statements. This paperwork is called a bankruptcy petition. The point of a bankruptcy petition is to disclose to the Bankruptcy Court and your creditors exactly what you own, what you owe, and whether you have the means to pay back some or all of your debts.
BANKRUPCTY TRUSTEE
A person will be assigned to your Chapter 7 bankruptcy case to review your petition and other documents. This person is called a Chapter 7 trustee. Your trustee will review your bankruptcy petition, and other forms and documents, to understand your finances, and to ensure that you have complied with the Bankruptcy Code.
MEETING OF CREDITORS
Your Chapter 7 trustee is also required to hold a meeting to discuss your petition, and to allow your creditors to ask questions about your financial situation. This is called a 341 meeting of creditors, and refers to Section 341 of the Bankruptcy Code which requires this meeting to be held.
DISCHARGE ORDER
Generally, once your 341 meeting has been completed, and all forms and required documents are filed with the Bankruptcy Court and provided to the trustee, the Bankruptcy Judge assigned to your case will enter a Discharge Order. This is a federal order that permanently discharges all of your old debt, with the exception of certain nondischargeable debt such as some student loans and tax debts.
Statistically, most people who file Chapter 7 bankruptcy, and who follow the required procedure, receive a Discharge Order in their case. This is one of the main goals of filing a Chapter 7 bankruptcy, rather than attempting a workout or settlement of your debts. This Order is recognized nationally, and is a major step towards rehabilitating your credit and reorganizing your finances.
Generally speaking, Chapter 7 bankruptcy can get rid of the following categories of debt for most people, which are referred to as dischargeable debts:
- Credit card debts
- Medical bills
- Personal guarantees on business loans
- Car note debt
- Mortgage notes
- Judgments that have become wage garnishments or bank levies
- Past due utility bills
- Apartment leases
Bankruptcy is so powerful because not only can it discharge these kinds of debts, but it immediately stops the enforcement of these debts. The mechanism that stops enforcement of these debts is called the “automatic stay”. This is a federal injunction against creditor collection action. The automatic stay remains in place unless it is modified by your Bankruptcy Judge, or until your case is completed. If these debts are discharged, the automatic stay is replaced by a permanent injunction put in place by the Discharge Order.
There are some debts that you cannot get rid of in Chapter 7 bankruptcy. These are called “nondischargeable debts”. Some of these nondischargeable debts include:
- Child support
- Alimony and support
- Recent tax debts
- Government fines
- Federal student loans
There are other kinds of debts that also stick around despite a bankruptcy. These are debts that are attached to your assets, such as a car note which is attached to your car. Another good example is a mortgage, which allows a lender to attach a home loan to your home. While the debt underlying these secured debts is itself dischargeable, and you can free yourself from the obligation to pay the debt, the debt remains attached to your asset, and you must pay the debt to keep the asset. In other instances, you may be able to modify secured debt, but that is not generally undertaken in a Chapter 7 bankruptcy. However, if you want or need to let go of the property securing a debt, then Chapter 7 bankruptcy can discharge that secured debt.
In the majority of Chapter 7 cases, people keep most of their assets. Exemptions are protections under state and federal law that are used in a Chapter 7 bankruptcy to protect certain types of property, up to certain limits, such as equity in a car, home furniture and electronics, clothing, certain amounts of cash, and other various assets. The kinds of property that can be protected, and the amount of value of that property, depends on the exemption claimed under state law or federal law. In New Jersey, most debtors use federal law exemptions due to the very small exemptions available under New Jersey state law. In New York, many debtors may opt to claim New York state exemptions because they offer a large amount of protections for home equity.
Chapter 7 bankruptcy is not recommended for people who own property that will not be protected by exemptions. This is because the Chapter 7 trustee assigned to a case has an obligation to sell property that is not protected by exemptions. This is why a Chapter 7 bankruptcy is called a liquidation, because all nonexempt assets must be liquidated for the benefit of creditors.
While you may qualify for Chapter 7 bankruptcy, and can file a petition with the Bankruptcy Court, the real question is whether you should file that petition. Even if you pass the “means test”, which allows people under a certain income level to file Chapter 7 bankruptcy, you may find your assets sold by a Chapter 7 trustee. It’s a risky proposition. So even if you don’t have income, or very low income, you may still need to consider filing a Chapter 13 reorganization bankruptcy to protect your assets.
Chapter 7 is generally a faster and simpler kind of bankruptcy. Chapter 13 is generally a 3 to 5 year reorganization, which is obviously slower, but is more complex and offers many more options to fix certain debt issues. In a Chapter 13 bankruptcy, you are in charge of your own reorganization, and you propose a plan to pay a certain amount of debt back. Debts that you pay back include tax debts that may not be able to be discharged in a Chapter 7 bankruptcy.
There are two main reasons why someone may file a Chapter 13 bankruptcy: (1) they have income that prevents them from filing Chapter 7 bankruptcy; or (2) they have assets that are not protected by exemptions and don’t want to risk losing those assets at the hands of a Chapter 7 trustee. There are also other less well known reasons to consider a Chapter 13 bankruptcy, including the super discharge offered by a Chapter 13 bankruptcy, which is not available in a Chapter 7 case.
Documentation
Preparation is the most important part of the process. Once you’re ready to prepare your petition, you need to collect all of the documents and information required to complete it. This includes 3 years of tax returns, 6 months of proof of income, copies of your most recent bank statements, copies of your credit card statements and other debts, and other information. A recent credit report can be very helpful. All of these documents and information are used to form an accurate picture of your financial situation, and to provide transparency to the Bankruptcy Court, your Chapter 7 trustee, and your creditors. The petition is a complex document that cross references itself in many sections. While you can technically prepare it yourself, it’s highly recommended that you hire experienced bankruptcy counsel.
Credit Counseling
You’ll also need to complete an online or on the phone course call credit counseling before your petition is ever filed with the Bankruptcy Court. This is a one hour course that, while crucial to filing the petition, the answers provided are not shared with the Bankruptcy Court. Once you complete the course, you’ll receive a certificate with a unique number proving that you’ve met the credit counseling requirement. This certificate is valid for 6 months.
Filing a Petition
Once your petition has been prepared, you must sign the petition confirming that all of the information is true and correct. You will then file the petition with the Bankruptcy Court. You will have to do this by hand if you don’t have access to the Bankruptcy Court’s website. An experienced bankruptcy attorney will have a streamlined process to file the entire petition and all related documents electronically using your electronic signature.
Trustee and 341 Meeting
Once your petition has been filed, the Bankruptcy Court will assign a case number, and a Chapter 7 trustee will be appointed. A 341 meeting date will be set. Your trustee will request copies of documents and information to be provided in advance of that meeting date. You must then appear at that 341 meeting on the day and time set forth in the notice. This meeting generally takes 15-30 minutes depending on the complexity of your case. You may have to wait substantially longer to be taken by the trustee, and their office usually sets many 341 meetings for the same day and time.
Debtor Education
Once your 341 meeting is completed, you will need to take the second course called financial management, and also known as debtor education. This second course lasts between 60 and 90 minutes long, and can be taken on the phone or online. Once that course is complete, you will need to file another signed certification of completion with the Bankruptcy Court.
Discharge Order
Once you’ve completed the debtor education course, and if your Chapter 7 trustee reports that no assets will be sold to pay debts, the Bankruptcy Court will be prompted to have a Discharge Order filed in your case. Your case should then close up in days following the entry of the Discharge Order.
Congratulations, you’ve completed your Chapter 7 case and received your discharge. You’re now free from some if not all of your debt. You likely have a much improved debt to income ratio, which is one of the factors that impacts your credit score. You may have freed up additional disposable income that you can use to save or pay down nondischargeable debt that you would have otherwise used to pay minimums or interest on your dischargeable debt. You may notice that if your credit score was lagging before bankruptcy, it improves based upon discharge of your old debt.
Hopefully the Chapter 7 bankruptcy process will have encouraged you to take a new look at your budget and to consider a more effective strategy to save, invest, and build your finances. While Chapter 7 bankruptcy stays on your credit report for up to 10 years, that does not mean you can’t build up your credit. In fact, the relief provided by bankruptcy may actually free you up to borrow money to buy a home or finance a car.
Aside from your option to consider Chapter 13 and even Chapter 11 bankruptcy, your options may be to work a voluntary settlement of your debts with your creditors. This can prove difficult unless you have cash on hand to make lump sum payments to your creditors. Debt repayment plans, over time, can also be an option, but you’ll need all of your creditors to agree to a plan, and most creditors seem to not want these plans to stretch out longer than 12 months. There are some companies that will offer to consolidate your debt, but they cannot make any promises that your creditors will go along with their debt consolidation plan. If a debt consolidation plan is unsuccessful, you may find yourself in a worse situation than when you started, and you may need to file a Chapter 7 bankruptcy after all. Of course, another option is to sell all of your assets to pay your creditors, assuming you have enough assets. However, this is not a viable option for most people, and you’d have to seriously consider whether that course of action really helps you meet your financial goals.
Most experienced bankruptcy attorneys offer free consultations to discuss your financial situation. Our attorneys at Middlebrooks Shapiro, P.C. constantly meet with people to discuss their financial situations, and help them all consider each of their unique situations. We are very experienced with Chapter 7 bankruptcy, and we know how to help people consider their options.
Attorney Melinda D. Middlebrooks & Attorney Joseph M. Shapiro have over 30 years of extensive bankruptcy experience. We handle cases from basic to the most complex. We offer a free, no-obligation consultation. From our office in Springfield, we work with clients throughout Union County and beyond by leading them through the legal process of numerous practice areas.
Call 973-218-6877 to speak with the experienced bankruptcy attorneys of Middlebrooks Shapiro. We’ll ensure you get the perspective you need to understand the full picture and the guidance to have a successful bankruptcy, rebuild your credit, and move forward with your new debt-free life.
About Middlebrooks Shapiro
At Middlebrooks Shapiro, our attorneys have over 30 years of bankruptcy law experience. From our office in Springfield, NJ, we help clients with the most basic or complex personal and business bankruptcy cases by leading them through the legal process of our numerous practice areas.
We offer a free initial consultation. Call 973-218-6877 to speak with the experienced bankruptcy attorneys at Middlebrooks Shapiro. We’ll ensure you get the perspective you need to understand the full picture and the right guidance to have a successful bankruptcy, rebuild your credit, and move forward with your new debt-free life.