TYPICAL CHAPTER 7 BANKRUPTCY FLOWCHART VIDEO
Have you ever thought about filing Bankruptcy? Ever wondered what that would be like from start to finish... and not just the actual bankruptcy case? We created the quick two minute video below to help explain what the typical Chapter 7 Bankruptcy entailed... from hiring an attorney to cleaning up credit after the bankruptcy case is over.
WHY FILE A CHAPTER 7 BANKRUPTCY?
A Chapter 7 bankruptcy is generally a great option for individuals who have (1) overwhelming credit card, medical, or personal debt; (2) are living paycheck to paycheck and have no leftover money at the end of each month; and/or (3) are able to pay their monthly house and/or vehicle payments but not much else. A Chapter 7 is probably not the best option for someone who is trying to restructure their debt payments (i.e. catch up on missed house payments, re-pay back tax debts, etc…) or for someone who does not “qualify” to file a Chapter 7 because he earns, or owns, more than an average amount. In these situations, a Chapter 13 may be a better alternative to a Chapter 7 filing. Please CLICK HERE to learn more about Chapter 13.
As most people know, the laws surrounding bankruptcies changed significantly in 2005. As part of the changes to the bankruptcy code in 2005, Congress implemented new income requirements that restrict who is able to file a Chapter 7 bankruptcy (ie who “qualifies”). These new income requirements are based upon average household income figures and will vary from state to state. Given the numerical aspect of the income requirements, whether or not a person “qualifies” may seem straightforward. As is common in legal matters, “qualification” to file a Chapter 7 is not as straightforward as it may appear, so before filing, or deciding whether or not you qualify to file, a Chapter 7, it may be beneficial to consult with an experienced bankruptcy attorney. For instance, there are many different strategies that an experienced bankruptcy attorney will know which could potentially help you “qualify” or better protect your assets. It’s for this reason, we offer free initial attorney consultations, so that we can help our clients confidently determine what their options are, free of charge.
THE “SIMPLICITY” OF A CHAPTER 7
The relative ease and speed by which a fresh start can be achieved (compared to other chapters of bankruptcy) is likely why the Chapter 7 Bankruptcy has been nicknamed the “Simple 7” and also why it’s the most commonly filed of the bankruptcy chapters. The typical Chapter 7 case requires only one appearance by the person who filed the bankruptcy (this person is called the “Debtor”), and is typically completely concluded four months after the case is filed.
THE EFFECT OF A CHAPTER 7 DISCHARGE
The typical Chapter 7 case concludes with the discharge of all dischargeable pre-bankruptcy filing debts. In other words, all of the debts owed to creditors before the Debtor filed his Chapter 7 (debts which can be discharged) are discharged by the Bankruptcy Court. A bankruptcy discharge order essentially wipes a Debtor’s credit slate clean by eliminating the Debtors legal obligation to repay the discharged debts. Without the legal obligation to repay discharged debts, creditors can no longer collect, or attempt to collect, debts discharged by a bankruptcy.
IMPORTANT INFO ABOUT NON-DISCHARGEABLE DEBTS
As mentioned above, upon completion of a Chapter 7 case and discharge, all of a Debtor’s dischargeable debts (such as credit cards and medical bills, etc..), which were incurred prior to the bankruptcy filing, are discharged. Unfortunately, there are certain debts which cannot generally be discharged in a bankruptcy (such as student loans, tax debt, and/or Court ordered family support debts). This means if a Chapter 7 Debtor owes any of these generally non-dischargeable debts, at the conclusion of the Debtor’s Chapter 7 case, these non-dischargeable debts remain unaffected and are still owed and collectable. Even though certain debts may not be discharged in a bankruptcy, filing a Chapter 7 bankruptcy can still offer other benefits or some amount of relief.
As discussed above, although back income taxes are generally non-dischargeable, there are certain situations where income tax debts may be discharged. Regardless of whether or not tax debts will be discharged, filing a Chapter 7 bankruptcy can stop all collection actions by the IRS, or other taxing agency, for the duration of the bankruptcy case. This means you can get a little “breathing room” while you are in your active Chapter 7 bankruptcy case.
As nearly everyone who owes a student loan know, student loans are unfortunately non-dischargeable. While there are very rare situations where student loans may be discharged in a bankruptcy, it is practically impossible to have student loans discharged in a bankruptcy. However, just as with tax debts, during a pending bankruptcy case, there is no requirement to make payments on student loans. However, because interest will accrue, and student loan lenders will continue reporting payments to the credit bureaus, it’s recommended that Debtors continue to make payments on student loans, if possible.
HOW A CHAPTER 7 DISCHARGE AFFECTS CAR AND HOME LOANS (ie. Secured Loans)
A commonly misunderstood aspect of lending in general is that when you borrow money to purchase certain assets, such as cars or houses, the bank or lender has two ways which they can collect from you, (#1) your personal promise and obligation to repay the loan, and (#2) a lien or contractual interest in the asset you purchased (This is why the lender retains title to vehicles until their loan is fully repaid).
Outside of a bankruptcy filing, if you can’t or stop making payments on these types of secured debts (ie. default) a lender can foreclosure or repossess the property and/or sue the individual for any deficiency owed if the property is sold for less than what was owed. As mentioned above, a bankruptcy discharge will eliminate # 1 (your personal obligation to repay the loan), even for loans secured by a lien or contract. Therefore the bankruptcy discharge will protect you from being sued for a deficiency balance owed. However, while the bankruptcy discharge may eliminate your own legal obligation to repay the loan, your lender can still repossess or foreclose on the secured property if you don’t continue to make your regular payments (under your lien or contract). This means if you don’t want to lose an asset secured by a lien or contract, you must continue to make your regular payments on the balance owed under the lien/contract, even though your own legal obligation to pay was discharged by your bankruptcy.
KEEPING YOUR ASSETS IN A CHAPTER 7
If you are like most people considering filing a Chapter 7 bankruptcy, you are worried about what will happen to all of your assets and property (ie. stuff). Actually, the vast majority of individuals and families who file a Chapter 7 bankruptcy are able to keep all of the assets they have or want to keep. This is because the majority of these Chapter 7 filers have little to no unprotected assets, and therefore little to nothing sold/liquidated. Taking a small step backwards, when filing bankruptcy, you are allowed to exempt (ie. protect) a certain amount of property/assets you wish to keep (ie. you don’t want to be liquidated). In addition to Federal Laws regarding bankruptcy and exemptions, nearly every state has created exemption statutes which specify what, and how much/many, assets a person or couple filing bankruptcy can exempt (ie. protect and keep) when filing bankruptcy. In a Chapter 7 bankruptcy (also nicknamed a “liquidation”) all NON-EXEMPT assets, owned prior to filing bankruptcy, are to be liquidated (ie. sold), so that the proceeds from these sales could be distributed to repay creditors. The reason such few assets are sold in Chapter 7 bankruptcies stems from the phrase “NON-EXEMPT” used above. In the less common situations where you have more assets than you can exempt (i.e. protect), before your bankruptcy is even filed, you get to choose what assets, or how much of your assets, you would like to exempt. However, if you are like the majority of these Chapter 7 filers, little to none of your assets will be "non-exempt" and will not likely be sold. Don’t forget, as mentioned above, if you have a home and/or vehicle which is exempt (or has no equity to protect), and you wish to keep it after your bankruptcy, you must continue to make any required payments due, whether or not the lender sends you regular statements.
Due to recent changes in Bankruptcy case law, lenders have begun requiring Debtors who file Chapter 7 bankruptcies to reaffirm their vehicle loans with the lender. As background information, if a Chapter 7 Debtor owes on a secured vehicle loan when they files bankruptcy, then they are required to state their intentions with regards to that secured loan (in their bankruptcy petition). If the Debtor’s intention is to keep the car, their petition must indicate they intend on keeping the vehicle and reaffirming the loan. A reaffirmation of debt, if approved by the Court, essentially means that particular debt is not discharged as part of the Chapter 7 discharge (even if it was a dischargeable debt!). In order to reaffirm a debt, a Debtor must enter into a reaffirmation agreement for the debt (typically sent by the creditor/lender), which is then filed with the Bankruptcy Court, where a judge will either approve or deny the reaffirmation agreement. The good news is, regardless of whether the local judge approves or denies a reaffirmation agreement, as long as a Debtor complies with the requirements under the Bankruptcy Code, they will generally be able to continue to keep their vehicle as long as they continue making her regular monthly payments.
DON'T LET YOUR QUESTIONS OR CONCERNS GO UNANSWERED!
If you, or a loved one, are considering filing a Chapter 7 Bankruptcy, and have any questions or concerns about anything mentioned here, we are happy to answer all of your questions. Please Contact Us with your questions or if you would like to set up an appointment for your free consultation with an experienced bankruptcy attorney.