Consumer Bankruptcy:

Chapter 7

Chapter 7 is the most commonly used type of bankruptcy; it erases all of an individual’s debt by completely liquidating his or her property in order to pay creditors. Federal laws or the laws of the debtor’s state provide certain property exemptions that can be kept; these include the tools of one’s trade, limited equity in a car or house, and certain personal effects. All debts that remain after the property liquidation are discharged and the debtor is given a chance to start over, completely free from debts. Chapter 7 very well may result in the loss of one’s home, though this varies from state to state, but it provides quick relief from debt. The entire process typically takes from four to six months, costs less than $300 in filing and administrative costs, and rarely requires more than a single trip to the courthouse.

The Bankruptcy Code changed dramatically on Ocotber 17, 2005 with the passing of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Enacted due to a dramatic increase in the number of Americans filing for bankruptcy each year, this change made the process of filing for bankruptcy longer, more expensive, and more difficult. One aspect of this was the enactment of a “means test,” to determine if a debtor could file for Chapter 7 or would be required to file for Chapter 13 (which involves the repayment of some debts).

When filing for bankruptcy, you need to fill out a two page petition and a number of other forms that ask for information concerning your current financial situation. Due to the new bankruptcy law, you are also required to submit a certificate that proves that you have satisfactorily completed a credit counseling course from a program approved by the government. A list of approved programs and agencies can be found on the website of the Department of Justice, here.

The Automatic Stay

One of the most beneficial effects of bankruptcy is the automatic stay, officially referred to as an “Order for Relief.” This provides immediate, though often temporary, protection from the claims of most creditors; they cannot pursue the money owed them by any means, including by garnishment of wages, taking from a bank account, trying to get your car, house, other property, or cutting of your utilities or welfare benefits.

Bankruptcy Court and Trustee

Filing for bankruptcy involves the debtor placing all of his or her property in the hands of the court. After filing, nothing can be done with the property without the permission of the court, including giving things away and even paying off previously incurred debts. With a few exceptions, property and money that are acquired after filing for bankruptcy are not under the jurisdiction of the court and can be used at the discretion of the debtor.

The way that the bankruptcy court functions is the through a court-appointed “bankruptcy trustee.” The task of trustees is to ensure that creditors receive the money that they are owed, or as much of it as possible; they are paid accordingly. The trustee and the trustee’s staff will examine the papers and property of the debtor in order to find any property that is not exempt and can be sold to repay the creditors.

Creditor’s Meeting

Some time after filing (usually less than two weeks) the debtor (and all creditors) receive notice that a creditors meeting has been set up by the court. The meeting is run the bankruptcy trustee, who swears in the debtor and may ask questions about the bankruptcy and paperwork, including whether it is all true. It is rare that creditors attend these meetings, but in the even that they do, they may also question the debtor. This meeting is done in the courthouse and only takes a few minutes. In most Chapter 7 cases, this is the only time the debtor has to go to the courthouse.

Following the creditor’s meeting, any property that is nonexempt must be surrendered to the trustee, or its equivalent value in cash. If the value of the property is minimal, or would be difficult to sell, it may be “abandoned” by the trustee, which means that the debtor can keep it. In almost all Chapter 7 cases, the property found is either exempt, or worth very little, so the debtor is able to keep it.

The laws governing exemptions vary from state to state. Items that are typically exempt include:

  • Some portion of the equity in motor vehicles (varying from state to state)
  • Necessary clothing (within reason)
  • Necessary household goods and furnishings (within reason)
  • Household appliances
  • Personal effects
  • Life insurance
  • Some portion of the equity in a place of residence (varying from state to state)
  • Pensions
  • Public benefits
  • Tools of the trade
  • Unpaid wages that were earned

If the debtor has pledged property (typically a house or car) as collateral for a loan, the loan is referred to as a secured debt. If the debtor falls behind in his or her payments, the creditor can request that the automatic stay be lifted so that the property can be repossessed or foreclosed. On the other hand, if the debtor is current with payments, the property can be retained and continue to make payments as usual; that is, unless equity on the property justifies its sale.

At the conclusion of the bankruptcy process, all debts are discharged (eliminated) except”

Debts that automatically survive bankruptcy unless a specific court ruling declares otherwise (This includes child support, alimony, many tax debts, student loans, etc)

Debts declared to be non-dischargeable by the court because of objections on the part of creditors (often these are debts as the result of fraud or malicious acts).

Post-Bankruptcy

Following bankruptcy, the debtor no longer legally owes money to any creditors. ;The debtor is no longer under the supervision of the court, but is still required to inform the court if her or she receives an inheritance, proceeds from insurance, or proceeds from a divorce settlement, within 180 days of the date he or she filed for bankruptcy. It will take a long time to rebuild credit, but within several years, reasonable interest rates will be offered for credit cards, mortgages, and loans. Finally, the former-debtor would not be able to file for Chapter 7 again for eight years from the original date of filing for Chapter 7.

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