Chapter 7 Bankruptcy
What is a Chapter 7 bankruptcy and is it right for me? A Chapter 7 bankruptcy allows individuals to eliminate most unsecured debts. In a Chapter 7 case, the you are not required to pay any of the debts owed to most unsecured creditors, but you may elect to reaffirm (remain personally liable to pay) specific debts.
In most consumer Chapter 7 bankruptcy cases, you will keep all of your property and eliminate most of your debts. The entire process is normally over and the case is closed within approximately 4 months after it is filed.
Once the bankruptcy is filed creditors are legally required to stop all collection efforts, including all collection calls, letters, lawsuits and garnishments. This continues after the bankruptcy is over and the debts eliminated, and you can not be legally compelled to pay any discharged debt.
What is Chapter 7 bankruptcy and how it can help you?
Chapter 7 is the best plan currently available to people in financial trouble. In a Chapter 7, if you are current on your mortgage payments and car payments and do not have a lot of equity in them you may be able to keep these items. This is also the bankruptcy that was targeted for elimination by Congress. The good thing is that it still exists, although less people qualify under the new law and are forced to file for a Chapter 13 instead. Some people automatically qualify for a Chapter 7 based on their Median income if they are not otherwise disqualified. The automatic qualifying median income is as follows:
Missouri Median Income Based On Family Size
From - http://www.moeb.uscourts.gov/pdfs/median_income.pdf
- 1 EARNER $39,332.00
- 2 PERSONS $51,120.00
- 3 PERSONS $58,610.00
- 4 PERSONS $69,832.00
- 5 PERSONS $77,332.00
- 6 PERSONS $84,832.00
- 7 PERSONS $92,332.00
- 8 PERSONS $99,832.00
If this law office does not see any advantage that a Chapter 13 would offer you, a Chapter 7 bankruptcy is the answer. A Chapter 7 will “fully discharge” your unsecured debts such as credit card bills and medical bills. Chapter 7 offers the same fresh start for these bills offered in the Chapter 13 program without the long term involvement of a Trustee and monthly payments. However, you must qualify for a Chapter 7, as it may or may not be for you.
Chapter 7: General Benefits
A Chapter 7 bankruptcy allows individuals to eliminate most unsecured debts. In a Chapter 7 case, the you are not required to pay any of the debts owed to most unsecured creditors, but you may elect to reaffirm (remain personally liable to pay) specific debts.
In most consumer Chapter 7 bankruptcy cases, you will keep all property, and eliminate most debts. The entire process is normally over, and the case is closed, within approximately 4 months after it is filed.
Once the bankruptcy is filed creditors are legally required to stop all collection efforts, including all collection calls, letters, lawsuits and garnishments. This continues after the bankruptcy is over and the debts eliminated-you can not be legally compelled to pay any discharged debt.
A chapter 7 is sometimes called a "liquidation" proceeding. This is because the trustee is allows to seize and sell your non-exempt assets, and distribute the proceeds to creditors. Do not fear as in almost all consumer Chapter 7 cases, you will keep all property because it is either exempt from seizure under Missouri state law or its value is so low the trustee will elect to abandon the property which means the trustee will not take it. Liquidation is a scary name that is rarely a reality since most people keep their all of their property.
The filing of your bankruptcy case creates a "bankruptcy estate." All assets you own on the date your case is filed become part of the bankruptcy estate. The estate includes all land, vehicles, personal property, all intangible property, such as damage claims you may have against others even if you have not filed the lawsuit), accounts receivable, or the right to receive commissions. Everything you own of any possible value or holds or may be entitled to receive is property of the bankruptcy estate.
Trusts and Pension, Retirement and Profit Sharing Plans
The assets contained in most trusts, and most pension, retirement and profit sharing plans, are not property of the bankruptcy estate and can not be seized by the bankruptcy trustee. If the trust or retirement plan has a provision preventing the proceeds from being transferred or assigned, and the provision is enforceable under federal or state law, the assets are excluded from the bankruptcy estate. Almost all retirement plans and trusts have such a provision. IRAs and 401K are clearly not part of the bankruptcy estate.
Trustee in Possession of Property in Bankruptcy Estate
Technically, the bankruptcy trustee assumes legal control over all your property in the bankruptcy estate as soon as you file your case. You can not lawfully sell or transfer any property unless: (1) the court signs an order permitting the sale; or (2) the trustee abandons the assets back to the debtor. The trustee rarely takes actual physical possession of any property. The trustee normally takes physical possession of property only if it becomes clear that the property is not exempt and the debtor is not legally entitled to keep it.
Importance of Filing Date
The bankruptcy estate is limited to property owned by the debtor on the date the case was filed. Property that the debtor obtains after the case is filed does not become part of the bankruptcy estate, and the trustee is not entitled to take it. For example, assume that several weeks after filing for bankruptcy, the debtor buys a power ball lottery ticket with funds earned after the case was filed. He wins 75 million dollars. Debtor is not obligated to give any of the money to the trustee for distribution to creditors because the ticket was purchased after the case was filed, with funds earned after the case was filed.
Three Exceptions to Filing Date
If within 180 days after the date your case is filed, you become entitled to receive any property: (1) from an inheritance; (2) from a property settlement agreement reached with a former spouse or contained in a divorce decree; or (3) as a beneficiary of a life insurance policy or death benefit plan, the property becomes part of the bankruptcy estate and can be taken and sold to satisfy the claims of creditors, unless it is exempt. You have an absolute duty to notify the trustee if one of these conditions arises. Failure to do so is a criminal act.
Trustee May Inventory Assets
The trustee has a right to inventory your assets. You are required to file a list of all the property you owned on the date the case was filed. The trustee has the legal right to visit you and personally count your assets. However, the trustee will almost never physically make an inventory of assets to determine if the debtor accurately disclosed all property. There are several reasons why a trustee will not be inclined to verify the accuracy of your property list. This does not mean they will not do a through job. Never understate your inventory. Trustees are trained professionals that are held to and uphold very high standards. They are adept at sniffing out the assets of frauds. You made your property list under penalty of perjury. You will be criminally prosecuted for perjury and bankruptcy fraud and serve prison time if the property list is not accurate. I have handled hundreds of filings for individuals and have never been involved in any case in which the trustee or his representatives have referred one of our clients out for criminal prosecution. We make it clear up front – if you lie you go to prison and if you tell us you are lying you need to find a new attorney. In bankruptcy there if no margin for error. If you lie, understate, hide or fail to disclose you have committed a serious felony and will go to prison.
You will hear this term before your bankruptcy is over. Secured debts are debts on which the creditor holds a "security interest" or "lien" on specific property to secure payment of the debt. If the debt is not paid, the creditor can seize and sell the property to satisfy the debt. Most home loans, vehicle loans and some jewelry or furniture store loans are secured debts because the contract documents allow the creditor to repossess the property if the loan is not repaid.
Will I Lose My Car or Home
This is the number one question asked by clients. If you are behind on auto or home payments you should not file a chapter 7. This is because the creditors will file a motion with the court to take your car or. You will then lose those assets. If this is your situation you will lose
Liens Survive Bankruptcy
In a Chapter 7 case, a "lien" against property will survive the bankruptcy, but the debt will be discharged. This means that the creditor can never attempt to recover the debt as a personal liability of the debtor. However, after bankruptcy, if the debt is not paid, the creditor can enforce the lien by repossessing the property, selling it, and applying the proceeds to satisfy the debt.
Options for Dealing with Secured Debt
A debtor in a Chapter 7 case the debtor will have three options for dealing with secured debt:
(a) give the property back and owe nothing;
(b) keep the property and reaffirm the debt;
(c) redeem the property by paying the creditor, in cash, the full market value of the property; or
For home and vehicle loans, a debtor that wants to keep the property may be required to sign a "reaffirmation agreement." A "reaffirmation agreement" is a contract which waives the bankruptcy discharge with respect to a particular debt. A debtor that signs a reaffirmation agreement must continue making the contract payments and will remain personally liable on the reaffirmed debt if he fails to pay. The reaffirmed debt will be completely unaffected by the bankruptcy filing, and will survive the bankruptcy discharge, as if the bankruptcy had never been filed.
Unsecured creditors will often solicit a debtor to reaffirm all or a portion of an unsecured debt by offering to extend additional post bankruptcy credit. The unsecured creditor will usually try to sell the reaffirmation agreement by arguing that the additional credit will help the debtor to reestablish a positive post bankruptcy credit history and minimize the adverse impact of the bankruptcy on the debtor’s credit report. It is almost never a good idea for a debtor to reaffirm a completely unsecured debt. Almost all debtors will have numerous sources for obtaining post petition credit, and can reestablish a positive post bankruptcy credit history, without agreeing to pay any portion of the prior debt.
Rescission of Reaffirmation Agreements
The Bankruptcy Code permits a debtor to rescind a reaffirmation agreement at any time prior to the date the Bankruptcy Court issues a discharge order, or within 60 days after the reaffirmation agreement is filed with the court, whichever event occurs later. In other words, a debtor that signs a reaffirmation agreement can change her mind until the later of:
(a) the date the court issues a discharge order, or
(b) 60 days after the reaffirmation agreement is filed with the court.
The Bankruptcy Code states that a reaffirmation agreement can be rescinded merely by "giving notice of rescission" to the creditor. Written notice is not legally required; oral notice is sufficient. However, a debtor will find it virtually impossible to prove that she verbally gave notice of rescission. Therefore, as a practical matter, to properly rescind a reaffirmation agreement, the debtor (or her attorney) should always prepare and send a written notice to the creditor expressing her intent to rescind the agreement.
Redemption of Property
Redemption permits a debtor to obtain possession of (and title to) collateral for a loan by paying its market value instead of the contract price. The redemption procedure permits a debtor to avoid paying the full contract amount for property that has depreciated in value.
An informal redemption occurs if the debtor and creditor reach an agreement concerning the value of the collateral and payment terms. Most department stores will negotiate with debtors concerning the amount and terms of payment, including the interest rate and amount of any monthly payments.
An "informal" redemption is informal because the debtor and creditor negotiate the deal between themselves. The bankruptcy court stays out of the process. All price and payment terms can be negotiated in an informal redemption.
Most redemptions are informal because both the debtor and creditor have an incentive to compromise. The debtor will usually want to keep the property if he can pay a reasonable price on fair terms. The creditor will gain little or nothing by taking the property. It is difficult for most creditors to profit from selling used consumer goods in a retail store. The repossession, storage and sale costs make it economically unwise for creditors to play hard ball in negotiating a redemption of consumer goods.
(a) Basics. A "formal" redemption is a bankruptcy court procedure permitting the debtor to redeem the collateral. To start the procedure, the debtor’s attorney must file a written motion requesting the court to authorize the redemption. The court will determine the property value and enter an order requiring the creditor to deliver the property (and legal title) to the debtor when the debtor pays the money.
A formal redemption is useful only if the debtor and creditor can not agree on the property value. Most creditors understand (or should understand) that if the debtor and creditor agree on the property value, it is pointless to force a debtor through a formal redemption process because the right to redeem is automatic. The only real function of the court in a formal redemption is to establish the redemption amount (the market value of the property) and force the creditor to complete the transfer.
(b) Legal Requirements. The formal redemption procedure is not available unless the debtor can prove the following:
(i) Personal, Family or Household Use. The property must be used primarily for personal, family or household use. The property can not be primarily used for business purposes.
(ii) Dischargeable Debts Only. The property must secure a dischargeable debt. A debtor can not formally redeem property securing a debt that is non-dischargeable in bankruptcy, such as a student loan, divorce settlement, or non-dischargeable tax debt.
(iii) Exempt Property Only. The property must be exempt from seizure under applicable federal or state law. See the "Exemptions" page for a discussion of federal and state exemptions.
(c) Disadvantages. The formal redemption procedure is rarely used because of two major limitations: the legal cost and the requirement of a cash payment.
(i) Legal Cost. A major draw back of formal redemption is the legal cost. To complete a formal redemption, the debtor’s attorney will need to prepare a motion and proposed order, and appear at a court hearing. The hearing may involve a small trial on the valuation issue. The debtor may also need to hire an expert to appraise the property and appear in court to testify about the value.
(ii) Cash Payment. Formal redemption also requires the debtor to pay the full amount in cash. The court may not allow the debtor to pay the redemption amount in installments. Most debtors do not have the funds available to pay for the property in cash.
The bankruptcy code contains a list of 9 different types of unsecured debts which have "priority" status over other unsecured debts. If money is available for distribution to creditors (a rare occurrence in a consumer Chapter 7 case), creditors holding priority claims will receive payment before any other unsecured creditors. All priority debts are "unsecured" because no specific property secures repayment of the debt. Priority claims receive payment in accordance with their rank in the priority scheme. Priority claims with a higher rank must be paid in full before priority claims of a lesser rank will receive any payment. Most priority classifications are not relevant in consumer Chapter 7 cases. The most important types of priority debts, and their rank, are as follows:
Claims for expenses incurred by the trustee or debtor in preserving estate property, including wages, salaries or commissions for services rendered after the case has been filed. This category includes attorney’s fees incurred by the trustee or debtor in preserving estate property, or bringing property into the estate.
Child Support, Alimony and Support
Debts owed for accrued but unpaid support or alimony payments owed to a spouse, former spouse or child.
Debts owed to governmental units for certain unpaid taxes. The following tax claims are considered priority debts:
Any income tax if: (1) less than 3 years elapse between the date the bankruptcy is filed and the date the tax return was last due, including all extensions; (2) the tax is assessed within 240 days of the date the bankruptcy is filed; or (3) the tax has not been assessed, but is legally assessable after the bankruptcy is filed (e.g. additional taxes assessed as a result of an audit).
Most employment taxes owed by employers.
A sales tax owed to a governmental entity.
A property tax more than one year in default before the bankruptcy petition is filed.
General Unsecured Debts
All debts other than secured and priority debts are classified as "general unsecured debts. Unsecured debts are debts which do not entitle the creditor to repossess any specific property if the debt is not paid. A "general" unsecured debt is an unsecured debt which is not entitled to priority.
Most credit card debts and medical bills are general unsecured debts. Debts obtained through the entry of a court judgment are also general unsecured debts, but can become secured against specific property if the judgment holder takes steps to secure the judgment in accordance with state law.