What Is Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is a liquidation of non-exempt assets that are used to pay off creditors.
In a nutshell, Chapter 7 Bankruptcy is a legal means designed to allow you have your unsecured debt such as credit cards and medical bills discharged, which means they are eliminated and you do not have to pay them. Assets that are not considered exempt can be liquidated, meaning sold off, to pay your creditors.
It should however be noted that most assets can be exempt from liquidation and in many cases the person filing for bankruptcy (petitioner) does not actually have to sell off any of their possessions in order to pay off their debts. The Bankruptcy Court takes into consideration the your income and the amount spent on essential needs such as mortgage/rent, food, clothing, and medical expenses in your Chapter 7 petition.
The Walker Law Firm works with bankruptcies throughout the Greater Dothan, Alabama area and can advise you on whether bankruptcy might be right for you.
Should I Consider Filing For Chapter 7 Bankruptcy?
In general, it could be a good idea to file for Chapter 7 if the total amount of your debt is more than half your annual income and if it would would take at least five years to pay off your debts, and if the amount of debt you owe causes continued stress in your life affecting your interpersonal relationships, your ability to sleep, or work performance. Also if you have little to no disposable income and your monthly income is below the median level in your state, filing for Chapter 7 Bankruptcy might be right for you.
What Happens Under Chapter 7 Bankruptcy?
The Automatic Stay Stops Nearly All Collection Activity Right Away
When you file for bankruptcy the Automatic Stay halts nearly all debt collections including most wage garnishments against you. By law, debt collectors are not allowed to contact you for the purpose of collecting, negotiating, or settling your debt with them after you file for bankruptcy. For unsecured debts such as credit cards, personal loans, medical bills, and even payday loans, the Automatic Stay remains in effect until the bankruptcy is discharged.
For a secured debt such as a car loan, the creditor can repossess the car under Chapter 7 Bankruptcy before the bankruptcy is discharged. The Automatic Stay still offers you time to make a decision on whether to keep your car and pay it off or get current on your payments, or give up the car and have the debt discharged. This would apply to any other properties that are not fully paid and on your bankruptcy schedule. Debt owed for child support or debts that were incurred fraudulently are not halted by the Automatic Stay under bankruptcy law.
The Role of the U.S. Trustee and Bankruptcy Administrator
The Trustee or Administrator who reviews your case will make a determination as to how much, if any, of your assets are non-exempt according to the means test.
When you file for Chapter 7 Bankruptcy your case will be assigned to a Trustee acting under the U.S. Trustee Program who will oversee your bankruptcy proceedings. The only exceptions being in the states of Alabama and North Carolina where bankruptcy cases are overseen by the Bankruptcy Administration. In these states a Bankruptcy Administrator oversees your case. If you live in Alabama, contact an experienced bankruptcy attorney serving Dothan, Alabama for more information on how this could affect your Chapter 7 Bankruptcy case.
Credit Counseling is required before you file for bankruptcy.
Credit counseling courses, required by bankruptcy law, can be completed online and they tend to be run by non-profit agencies approved by the U.S. Trustee Program or the Bankruptcy Administration in the states of Alabama and North Carolina. If you are considering filing for bankruptcy, a bankruptcy attorney can be helpful with suggesting a credit counseling agency.
When taking the course, you will be asked questions about your income, rent or mortgage, utility bills, credit cards, and other debts and expenses. There will also be questions on your personal property and assets including any checking, savings, or retirement accounts. The course also pre-determines whether your assets would be considered non-exempt under your Chapter 7 case. After you have completed the course a certificate is sent to you and your bankruptcy attorney. This needs to be included with the information in your bankruptcy filing.
Your Assets in a Chapter 7 Bankruptcy Case
Exempt and Non-Exempt Assets
The Means Test
Under Chapter 7 Bankruptcy there is a means test that takes into account your income and assets in determining whether any of your personal property would need to be sold. Some personal property will automatically be considered exempt such as clothing, a car that is paid in full, basic furniture and household necessities. The benchmark varies by state so if you live in Alabama you can contact a Dothan area attorney familiar with the Chapter 7 Bankruptcy laws in Alabama for more information.
If you fall below the benchmark for the means test then all of your personal belongings, possessions, and financial accounts will be considered exempt. If according to the means test you are above the line, then the Trustee or Administrator can sell off certain assets that you own in order to pay off your debts to your creditors. In the overwhelming majority of Chapter 7 cases, the filers assets are considered exempt so that all of their personal property and possessions are protected from your creditors.
Unsecured Debt and Chapter 7
Unsecured debt is debt with no collateral such as personal loans and medical bills. Under Chapter 7, these debts are often discharged when the bankruptcy is fully discharged. The bankruptcy trustee who is assigned to your Chapter 7 Bankruptcy case can determine that personal items and property that belong to you must be sold in order to pay off the unsecured debt to your creditors. But in most cases you may not actually be required to sell personal property or possessions to pay your unsecured debt under Chapter 7. In general, bankruptcy petitioners with large amounts of unsecured debt and who are not looking to keep their house or continue making car payments, are good candidates for Chapter 7 .
Secured Debt and Chapter 7
Secured debt, is debt that is secured by collateral like an automobile loan. It is possible to keep your car but under Chapter 7 you would need to pay back any past due amounts owed and would need to reaffirm the loan and resume on-time payments.
The problem with this option is that if you have already missed payments, or have extended the term of your payments you may find yourself owing much more than the car's value. Additionally, if the car is in need of repairs, this would add more to the expense of keeping it.
If are considering bankruptcy but you feel that you can afford to keep your car, you would need to reaffirm the loan with the lender under Chapter 7. They will send you or your bankruptcy lawyer a form asking you to reaffirm the debt and they will likely want you to pay back the past due amounts promptly. In rare cases lenders will be willing to renegotiate the loan but more often they are not willing to do so. One drawback to affirming the loan is that if you find yourself unable to make the payments following the discharge of your bankruptcy, there are no bankruptcy protections preventing them from repossessing your car.
Discharge of secured debt under Chapter 7
With Chapter 7 Bankruptcy you do have the option of surrendering the car and having all of the past amounts due along with any amounts owed for duration of the loan discharged. In other words, you can walk away from the car and the loan. Many filers for Chapter 7 choose this option. You would inform the lender that you do not wish to keep the car and do not intend on making past or future payments that are due on your auto loan.
If you choose this option, the advantage is that all of the past payments, interest, and late fees are discharged under Chapter 7. Also, the future loan payments owed are also discharged under Chapter 7 and you are not responsible for any repairs that need to be made to the car. What you do need to consider is that at that point, the lender can repossess the car. You can make arrangements with the lender to surrender the car or have them pick it up.
If I lose my car, how do I get around?
You may be asking yourself this very question, but Chapter 7 does not mean you will necessarily be without a vehicle.
When the Automatic Stay goes into effect, you are temporarily relieved of making any debt or loan payments you may have. So if you are working or have a steady income, you would have the opportunity to save some money to purchase an inexpensive used car since you are keeping more of the money you make.
There are also auto lenders that are willing to work with people who file for Chapter 7 Bankruptcy and are looking to purchase a new or late-model car. In some cases they may work with you even before your bankruptcy is discharged. You will likely have to pay a sub-prime, or higher interest rate on your auto loan but if you can make all of your payments on time for roughly one year you could have to opportunity to improve your credit score and possibly refinance or trade your car in for a better rate on a car loan.
What if I own a home?
If you own a home and are looking to keep it, Chapter 7 Bankruptcy may not be your best option. It may be possible under Chapter 7 if you are current on your mortgage loan and you do not have too much equity in your home. If there is significant equity in your home the trustee in charge of your case can use that to pay off other creditors and you would lose your home. If you do own a home and are considering bankruptcy, you may want to consider filing for Chapter 13 Bankruptcy instead of Chapter 7 Bankruptcy.
Can All Debt Be Discharged?
Under federal bankruptcy law, certain debts are not dischargeable through Chapter 7. Debt for child support or debts that were created through fraudulent means cannot be discharged under bankruptcy law. Money owed for taxes or student loans most often cannot be discharged either under Chapter 7. There are certain requirements for tax debt to be discharged and you would have to show undue hardship in order to have your student loan debt discharged, but more often than not these is not granted through bankruptcy.
Final Discharge Under Chapter 7 Bankruptcy
Prior to the discharge of your bankruptcy case, a Debtor Education course is required.
Before your bankruptcy debts can be discharged under Chapter 7, you are also required to take the Debtor Education course. Similar to the Credit Counseling course, this course can be taken through an U.S. Trustee Program approved service or through the Bankruptcy Administration, depending on the state where you live.
The purpose of the Debtor Education course is to teach you about financial management to avoid getting back into the excessive type of debt that caused you to seek bankruptcy relief. It will help you with budgeting strategies that can keep you from falling back into debt.
At this point a 341 Meeting for your Chapter 7 Bankruptcy, also known as a Meeting of the Creditors is scheduled. You will meet with the Trustee at this meeting and if you have a bankruptcy attorney, your attorney will be there with you. In most cases, the creditors do not necessarily come to the meeting in Chapter 7 Bankruptcy cases unless fraud is suspected.
At this meeting you will swear under oath that the information that you provided to the Trustee through your Credit Counseling Course and your Chapter 7 filing is true. You will likely be asked a number of questions by the Trustee based on the information you provided in your bankruptcy petition and will also be required to confirm your identity. The Trustee or Administrator will also want to confirm that you have taken both the Credit Counseling and Debtor Education courses as required under bankruptcy law.
The 341 Meeting is not a trial but it is a legal proceeding that requires you to swear under oath. Consider having an attorney experienced with Chapter 7 Bankruptcy at your side for the 341 Meeting as well as the entire bankruptcy process.
Following the 341 Meeting, your bankruptcy case may be further reviewed but if all of the information that you provided is correct and there are no challenges to your case, your entire Chapter 7 Bankruptcy case will be discharged. This can sometimes take up to one year but in some cases bankruptcy discharges can be concluded in as little as 30 days.
What About My Credit Score?
When your Chapter 7 Bankruptcy is filed and then discharged, it will show up on your credit report, on which your credit score is determined.
Following discharge of your case, Chapter 7 Bankruptcy will remain on your credit report for 10 years. While this is a negative mark, people who file for Chapter 7 can actually see their credit score rise after discharge, and in some cases after filing. While the bankruptcy is a negative mark, your credit score may rise as your creditors are informed of your filing. Since most creditors will not dispute your filing, a few might begin to remove the debts that you owe them after you file.
After the discharge of your bankruptcy under Chapter 7, even more of your debt, loans, and collections will disappear as the accounts are closed and the debt is discharged. This applies to all dischargeable debt including credit cards, loans, and collection accounts.
As the debts and collections disappear, your credit score could rise. At this point it is up to you to maintain your improved credit by making on-time payments. As more on-time payments are recorded your credit score could increase which may allow you to borrow or refinance at lower interest rates. In this way, filing for Chapter 7 Bankruptcy offers you a chance to actually rebuild your credit.
Can I File For Chapter 7 Bankruptcy Without A Lawyer?
Yes, you can but filing for Chapter 7 can be a complicated and detailed process.
Accuracy is essential and if deadlines are not met or you don't provide the right information, your bankruptcy case could be dismissed. Having the right bankruptcy attorney for your Chapter 7 Bankruptcy petition can help make sure that you get most financial relief possible and avoid costly mistakes.
Maybe you are thinking about bankruptcy but not sure whether to file for Chapter 7 or Chapter 13. If you are wondering if you need a bankruptcy attorney experienced with Chapter 7 Bankruptcy contact us for the information you need. We can help you figure out what would work best for you. Before you decide to go it alone, contact the Walker Law Firm for a FREE bankruptcy consultation! We serve the Greater Dothan, Alabama area.