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Filing for Bankruptcy – Chapter 7
The primary purpose of a Chapter 7 bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” To accomplish this, unsecured debts are generally discharged. However, the Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 makes it more difficult for some people to pursue a Chapter 7 bankruptcy. As of October 17, 2005, one may not file bankruptcy under Chapter 7, as a consumer or business, if deemed capable of paying off his or her creditors based on a new criterion known as the “means test.” First, the means test looks at your average yearly income. If your income does not exceed the median income for your state then you qualify for the Chapter 7 (medium income data as computed by U.S. Census Bureau statistics). However, if your income exceeds the median, then the means test compares your excess monthly income and your amount of debt to determine how much you can pay your creditors. After application of the means test, only those deemed incapable of paying their debts will be allowed to proceed with a Chapter 7 (discharge) bankruptcy. Those deemed capable of paying will either have their case dismissed or converted to a Chapter 13 (repayment plan) bankruptcy.
A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as does a Chapter 13. For in a Chapter 7, providing that there is no property that is “non-exempt” that the trustee can sell to pay creditors, all unsecured debts are wiped out, or “discharged.” Secured debts, such as a car or home, may be either “reaffirmed” to keep that property and debt, or “surrendered” in which the debtor gives up the property to the bank and the debt becomes wiped out through the bankruptcy procedure. “Exempt” property includes your home, vehicle, or any other personal property not exceeding $1,000. in value ($2,000. for a couple filing jointly); and generally garage sale value is the accepted valuation of a debtor’s owned, used stuff. If one has property exceeding the allowable exemptions, such as a second home or car, then one must file a Chapter 13.
The debtor files a petition with the Bankruptcy Court serving the area where the individual lives. A husband and wife may file a joint petition. Schedules and statement of financial affairs are also filed with the Court. Generally, to complete the forms, the debtor will need to compile (a) a list of all creditors, their billing addresses, and the amount owed (b) the source, amount, and frequency of the debtor’s income (c) a list of all of the debtor’s property; and (d) a detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, ect.
The 2005 Act requires additional production of documents, including (a) a certificate of receipt of the statute 342(b) Notice, (b) receipts for payments received from your employer 60 days before the filing of the petition (c) a statement of your monthly net income itemized to show how calculated, (d) a statement of any anticipated increase in income or expenses in the 12 months following the filing of the petition, (e) a copy or transcript of your most recent federal income tax return, and (f) a certificate of “briefing” from an approved credit counseling agency and any repayment plan developed by said agency. Said “briefing” must be received by the debtor from an agency on the Court’s approved list in the 180 days prior to the filing of the bankruptcy petition. Under the 2005 Act, failure to file all required documentation within 45 days after filing the petition will normally result in the dismissal of the case on the 46th day.
Upon filing your Bankruptcy petition with the court, you will pay a fling fee of $335. Under the new law, the bankruptcy court may waive the filing fee if your income is below specified levels and the court determines that you cannot pay the filing fee installments.
Once the bankruptcy petition is filed, creditors may not contact you about your debts. All action to collect the debts is “automatically stayed” by the filing of the bankruptcy. However the 2005 Act contains various exceptions to the automatic stay, limiting debtor protection and /or requiring demonstration of good faith in cases of (a) “serial filing” (filing a new bankruptcy case on the heels of the dismissal of a previous case), (b) transfer of real property collateral without the approval of the secured creditor or the court, and (c) under certain circumstances involving the eviction of tenants.
Federal law allows states to decide which assets are exempt from bankruptcy. See 11 U.S.C statute 522(b). By filing under Chapter 7, you will be allowed to protect and retain your property that is classified as “exempt” under your state’s exemption laws. Under the 2005 Act, you must have lived in your state of residence for a period of at least two years to use the exemptions of that particular state. If your have not resided in any one state of 180 days or longer, you can use the federal exemptions. The 2005 Act’s revisions to the amount you can claim as exempt for your home (“homestead exemption”) took effect on April 20, 2005. The new law limits the homestead exemption to $125,000 if the property was acquired within the previous 1,215 day period, excluding previously transferred equity from a prior principal residence.
After fling the petition, a meeting of creditors (the “341 meeting”) is scheduled and held usually within 20 to 40 days. A notice of the place and time will be provided to the debtor by the Court. The meeting of creditors is not conducted by a judge, but by the bankruptcy trustee. The trustee administers the case and liquidates non-exempt assets, if any. Creditors are allowed to attend and ask questions. However, more often than not, most unsecured creditors do not attend this meeting. All debtors must attend or the case may be dismissed. The trustee may ask questions to make sure that you understand bankruptcy and that you have disclosed all assets and debts.
After filing, a bankruptcy trustee is appointed to the case by the Court or U.S. Trustee’s office. There is typically a group of Chapter 7 trustees who alternate on case assignments. The trustee will see your non-exempt property to pay your creditors. If, as is often the case, all of the debtor’s assets are exempt or subject to valid liens, there will be no distribution to unsecured creditors. These are called “no asset” cases. In a “no-asset” case creditors do not generally file a proof of claim showing the amount of their debt.
In an “asset” case the creditors are required to file a proof of claim within 90 days of the meeting of creditors. You may pay the fair market value of the property to the trustee, or substitute exempt property of equal value if the trustee agrees. For the debts for which you have pledged collateral for the loan (secured debts), you may either allow your creditor to repossess the property, continue making payments on the property if the creditor agrees, or pay the creditor a lump sum for the property. You may hear the term “bankruptcy estate.” This is all of your property and is used to refer to the bankruptcy assets. The creditors are only paid from non-exempt assets of the estate, if any.
A discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor or his property to collect the debts. In most cases, unless a complaint has been filed objecting to the discharge or the debtor has filed a written waiver, the discharge will be granted within 60 to 90 days after the date first set for the meeting of creditors. Under the 2005Act, however, you must undergo a court approved personal financial management education program in order to receive a discharge.
Prior to the 2005 Act, bankruptcy law prohibited you from receiving a discharge from your debts under Chapter 7 if you received a prior discharge within six years or your new filing. Under the new law, you cannot receive a discharge under Chapter 7 if you received a prior discharge within eight years of the new filing.
Among the grounds for denying a discharge to a Chapter 7 debtor are that the debtor failed to keep or produce adequate books or financial records; the debtor failed to explain satisfactorily any loss of assets; the debtor committed a bankruptcy crime such as perjury; the debtor foaled to obey a lawful order of the bankruptcy court; or the debtor fraudulently transferred, concealed, or destroyed property that would have become property of the bankruptcy estate.
When a debt is discharged the creditor may no longer initiate or continue any legal or other action against the debtor to collect the obligation.
A discharge under Chapter 7, however, does not discharge (1) alimony and child maintenance and support obligations – and, under the 2005 Act, divorce property settlements, (2) certain taxes, (3) debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit – and the 2005 Act makes any student loan nondischaregable, (4) debts for willful and malicious injury by the debtor To another entity or to the property of another entity, (5) debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, or (6) debts form criminal restitution orders under title 18, United States Code. The presumption for nondischargeablility for fraud in the use of a credit card is expanded by the 2005 Act, which likewise provides more scrutiny to transfer of assets to trusts within 10 years of filing the petition. To the extent that these types of debts are not fully paid in the Chapter 7 case, the debtor is still responsible for them after the bankruptcy case has concluded.
If you desire to retain secured property and pay the debt you may keep possession and “reaffirm” the debt. Generally, to reaffirm, you must be current in payments and keep payments current. This is often used with an automobile or real estate. Some creditors will reaffirm the debt for less than the amount owed but they are not required to do so. Courts may require that the debt be reaffirmed to keep the property, or allow the debtor to retain the property as long as the debtor pays the debt to the creditor without reaffirmation.
The reaffirmation should be accomplished prior to the granting of a discharge. A written agreement to reaffirm a debt must be filed with the court and generally approved by the judge. The 2005 Act puts new restrictions on reaffirmation agreements, in that if the debtor cannot show the financial resources to pay the debt, the court may disallow the reaffirmation.
In a “no asset” case the case is generally over after the discharge has been granted and any outstanding motions have been resolved. In an “asset case,” the case will be over and a discharge granted after the bankruptcy trustee has sold non-exempt property and paid over the proceeds to the appropriate creditors.