FAQ – Chapter 7 Answer
1. What is Chapter 7 bankruptcy?
There are 2 types of bankruptcy – personal and business. Chapter 7 bankruptcy is a personal type bankruptcy. With this type of bankruptcy a debtor is able to liquidate all non-exempt assets to pay off creditors in full or in part. Upon payment and/or satisfaction of the debt, the debtor is offered a discharge of all unsecured debt.
2. Who is eligible for Chapter 7 bankruptcy?
Qualification for a Chapter 7 bankruptcy requires debtors passing a means test. This test is compared to the incomes of families of the same size and in the same state. In order to pass, a debtor’s income must fall below the median incomes of families in the same state.
Any person that is over-extended in debt due to loss of job, medical bills, lack of income to pay off bills, below stellar credit, and collection accounts should consider a Chapter 7 bankruptcy.
3. What is a non-exempt asset?
Federal and state laws allow personal property exemptions to keep when the debtor files a Chapter 7 bankruptcy. Household goods, clothing, furnishings, tools of the trade, jewelry and any personal effects that you may own are non-exempt assets.
4. Can I keep my house when I file a Chapter 7 bankruptcy?
Keeping your home is an exemption that you may keep provided your states exemptions are above the market value of your home. If there is not enough equity in the home to pay off your creditors, then your home will be abandoned by the trustee and claimed as a “no asset” case. On the other hand, if there is ample equity to liquidate the property to benefit the creditors, your property may be sold. If you wish to save your home, consider filing a Chapter 13.
In today’s market, most homes are “underwater” and are not being liquidated to pay creditors.
5. What debts can I eliminate when I file a Chapter 7?
A chapter 7 bankruptcy will eliminate debts such as, credit cards, department store cards, some medical bills, payday loans, some personal loans, utility bills, any state exemption that is at or below market value, and more.
6. What debts cannot be eliminated in a Chapter 7?
Debts that cannot be eliminated are mortgages, child support, alimony, some medical, student loans, criminal fines, personal secured loans, and some taxes.
7. Do I need a bankruptcy lawyer?
The bankruptcy laws are not what they use to be. Bankruptcy laws changed in 2005 and are now known as the Bankruptcy Abuse Prevention and Consumer Protect Act (BAPCPA). Filing for bankruptcy requires much more paperwork and meeting strict guidelines. Although it is not required to hire an attorney, it is advised to acquire the services of a competent bankruptcy attorney.
A bankruptcy attorney provides the court-appointed trustee with all necessary paperwork in preparation for the 341 Meeting of Creditors that they will attend with the debtor. In addition, an attorney may need to prepare and file reaffirmation agreements which will permit the debtor to keep secured assets, such as a home or car.
8. What is a 341 meeting?
One month after a bankruptcy has been filed a 341 Meeting of Creditors is scheduled to review the debtors income and assets. The trustee, attorney, debtor and any/all creditors are invited to attend. Most of the time, creditors will not attend. The trustee will conduct the meeting by asking questions related to the statement of financial affairs, previous bankruptcies, current filing of tax returns, mortgages and other assets, transfers of any property, life insurance, medical bills and the list goes on and on. Overall, the meeting will be very short and in most cases will not last longer than 30 minutes (most end in about 5 minutes).
9. Someone told me that I make too much money for a Chapter 7 Bankruptcy. Is that true?
That may be true if your income falls outside of the means test. If it does you will be required to file a Chapter 13 bankruptcy.
10. What is the means test?
The means test is a formula used to establish the median income level of a debtor in comparison to other families of the same size and living in the same state. If the income is lower than the median income, then the debtor will pass. Conversely, if it is higher than the median income, then the debtor will not be allowed to file a Chapter 7.
With the advent of the BAPCPA, the means test was implemented to prevent high income individuals (who could pay off their debts) from filing a Chapter 7 bankruptcy.
11. What is an unsecured debt?
An unsecured debt is a liability that is not used as collateral for a security on a loan. Credit cards, medical bills, payday loans are unsecured debt.
12. What is a secured debt?
A secured debt is an asset that is attached to a tangible or intangible asset to be collateralized as security for payment of a debt. Example: home, car, boat, cash, etc.
13. What is the purpose of a bankruptcy trustee?
A bankruptcy trustee will be appointed by the federal court to handle and manage the debtor’s estate. In essence the debtors estate is legally under the control of the bankruptcy trustee. The trustee will review the creditors claims, investigates the assets of the debtor, collects proof of insurance, collects payments and attends the 341 Meeting of the Creditors.
14. How long does it take to file bankruptcy?
If the debtor and attorney are both organized and available to fulfill the requirements of the Chapter 7 bankruptcy, it can be filed almost immediately. It is best to prepare well in advance of deadlines, such as a foreclosure. A bankruptcy can and will be stopped by an “automatic stay” from the courts.
15. How long does Chapter 7 bankruptcy last?
In most cases, the Chapter 7 process will take four to six months before a discharge is filed. However, consult with your attorney to find the exact process.
16. Must I include all my bills when I file bankruptcy?
All debts must be included when filing a Chapter 7 bankruptcy. Should you wish to keep some of your debts, such as a car loan, then you must reaffirm with the creditor and continue to make payments.
17. Can I add debts that I forgot after I file for bankruptcy?
As long as your bankruptcy case remains open, you may add creditors to your case.
18. What is a redemption agreement?
In your Schedule D – Creditors Holding Secured Claims the debtor will have to indicate what they want to do with a secured property. If the debtor elects to redeem the property, then a redemption agreement between the creditor and debtor is made agreeing to pay off a secured debt for less than what is owed. Ex: A car is worth $10,000, current value is $7,000 the debtor redeems the car for $7,000 or less.
A redemption agreement is not mandatory, the debtor has 2 other options that can be chosen 1) surrender the property 2) reaffirmation agreement – making timely payments.
19. What is a reaffirmation agreement?
A reaffirmation agreement is another option that the debtor may elect should they decide to keep the secured property. To reaffirm a debt the debtor and the creditor enter into a reaffirmation agreement in which the debtor promises to continue to make monthly payments to retain the property.
The only time a reaffirmation agreement may not be approved is if the courts feel that it presents an undue hardship on the debtor.
20. Will filing a Chapter 7 bankruptcy hurt my credit?
A Chapter 7 bankruptcy will have a negative effect on your credit report and FICO score. The impact to your credit score is almost impossible to predict. Nevertheless, FICO released information that shows a bankruptcy could affect your credit score by 240 points for individuals with a 780 FICO and 150 points for individuals with 680 FICO. Bottom line, the scores could drop to approximately 540.
21. How often can I file a Chapter 7 bankruptcy?
You can file a Chapter 7 bankruptcy every 8 years. In principle, a chapter 7 bankruptcy can be filed as often as you like. But, if you filed a chapter 7 bankruptcy within the last 8 years, your debts will not be dismissed. Even though your debts may not be dismissed, there may be an advantage to filing a bankruptcy again, if it is done to stop foreclosure.
22. How much does Chapter 7 bankruptcy cost?
Bankruptcy costs vary depending on the complexity of each case. Generally speaking and depending on the state you live in, costs can be as low as $1,500.00 or more. Court costs fees usually start at $300.00 and go up depending on the state.
Attorneys fees are public record and must be disclosed in a bankruptcy filing listed on the Statement of Financial Affairs #9. You may visit the federal PACER website to do a party search. In addition, you are required to take a credit counseling and personal financial management course prior to the discharge of a bankruptcy. The costs are typically $50-$100 depending on the location.
Consult with your attorney regarding fees.
23. What is an exempt asset?
Exempt assets are tangible/intangible personal property that the debtor may keep up to a certain value according to federal/state’s exemption laws: (Be sure to check your states bankruptcy laws)
- Household appliances and furnishings
- Jewelry, up to a certain value
- Autos, up to a certain value
- Real estate, portion of excess equity
- Pensions and Retirement Accounts
- Life insurance
- Public assistance
- Social security
- Unemployment compensation
- Tools of the trade
A non-exempt asset is a tangible or intangible property that can be sold by the court to satisfy any outstanding and delinquent debts to the benefit of the creditor. When an asset is greater than the federal or state’s allowed exemption amount it may become the following non-exempt asset.
- Cash, bank accounts, stocks, bonds, and other investments
- Family heirlooms
- Collections of stamps, coins and other valuable items
- A second car or truck
- Vacation home or second home
- Expensive musical instruments, unless it’s the debtors tools of trade