Chapter 7 Bankruptcy.

Chapter 7 is the part of the bankruptcy code that deals with straight up liquidations of primarily consumer debt.  The petitioner files a list of all property and debt, and any property that isn’t exempted by federal or state law can be sold by the U.S. Trustee, for the benefit of creditors.  When the process is complete, the debtor receives a discharge of their debts (With some exceptions.  Some types of debts are not dischargeable.)  The debt relief is permanent and immediate.  While Chapter 7 is a liquidation, the truth is that the vast majority of people end up not losing any property during a Chapter 7, as their possessions are either covered by the exemptions available to them in their state, or what remains is not worth the time and expense for the trustee to seize, assess, and sell for the benefit of creditors.

Chapter 7 Bankruptcy is a Liquidation of non-exempt assets and debts.

Qualification for Chapter 7.

Previous Filings

A debtor may not receive a discharge in a Chapter 7 bankruptcy if he has received a discharge in a Chapter 7 bankruptcy filed within the last 8 years.  A debtor may not receive a discharge in a Chapter 7 if he has received a discharge in a Chapter 13 bankruptcy filed within the last 6 years, unless all unsecured creditors were paid in full or the Chapter 13 was a best efforts plan in which the unsecured creditors were paid at least 70% of their claims.

The Means Test

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed a lot of the rules around Chapter 7, to avoid what the credit industry regarded as abuse of the bankruptcy process.  As a result a number of safeguards were put in place to keep people who still had an above average income, and could pay back a fair share of their debts after reasonable living expenses, over 3-5 years, from qualifying for a Chapter 7.  Generally, if you earn less than the median family income for your size family, in your state, you will qualify for a Chapter 7.  If you earn more than the median family income for a family your size in your state, there is a presumption that there is abuse, but if you can not pay back a substantial portion of the debt owed over 5 years, you may still qualify for Chapter 7.

The Safe Harbor for Those With Less Than Median Incomes For Their State.

As indicated above, those who have below average income for their family size in their state are not required to meet the ‘means test’.  The current monthly income is determined by taking the average of the last 6 months family income from all sources (with the exception of Social Security benefits).  This is then multiplied by 12 and compared to the median annual incomes for a family of the same size in the state of residence.  The current median annual incomes (as of 11/1/2011) for Washington State as listed on the U.S. Trustee Program website are as follows:

1 earner:    $51,671

2 people:    $61,919

3 people:    $69,195

4 people:    $80,404

For each additional person add $7500.

Of course, even if you are below median, it is still possible that if you have a large amount of disposable income, that a US Bankruptcy Judge may require you to submit to a Chapter 13 Bankruptcy plan.

Over median filers

If a debtor’s family income exceeds the median income for a family of their size in their state,they may still qualify for Chapter 7.  The bankruptcy court presumes that there is abuse, and rebut that presumption, the debtor must pass a means test which takes into consideration their income, allowed expenses, and the amount of unsecured debts which the debtor owes.  The exact calculations are complex, and the allowed expenses can vary by local custom, so it is best for the debtor to discuss this means test with their bankruptcy attorney.

Special Circumstances

Even if a debtor fails the means test on its face, it is possible to have exceptional expenses taken into consideration, which can make quite a bit of difference.  An example of a special circumstance would be costs of a serious medical condition not covered by health insurance.  Ultimately the Trustee and Bankruptcy Court determine what sort of circumstances count as exceptional.

Most people with few assets and below median family incomes will qualify for a Chapter 7 bankruptcy.  In some borderline cases, a debtor may start out with a Chapter 7 filing and end up with a Chapter 13 case, if the Bankruptcy Court determines that abuse of Chapter 7 exists.  There is some uncertainty inherent in the system.

Once Qualified.

Assuming that a debtor qualifies for a Chapter 7, and there are no issues regarding abuse, from the debtor’s perspective, the process can be broken down into a few periods.

Pre-filing

After a debtor has hired a bankruptcy lawyer, the heaviest lifting for the debtor is the outlining of assets, liabilities, and income, and the collection of necessary paperwork to establish proof of these.  This is troublesome because the Bankruptcy Court expects the debtor to list ALL of their belongings and assets, ALL of their debts, and all income.  Failure to do so can be problematic as it is sometimes difficult for the debtor to remember everything.  It is important they do so though, as many trustees (US Department of Justice appointees who are responsible for managing the bankruptcy estate for the benefit of the creditors) will go out of their way to liquidate assets that were not disclosed, even if they would have been covered by an exemption, or the trustee would otherwise not have pursued the asset.  Also, any debts not listed in the bankruptcy filing can escape discharge.  Finally, if the Court finds that information was left out for fraudulent purposes, they can dismiss a debtor’s case without discharge (and with no opportunity to refile), or in extreme cases, debtors have been known to serve jail time for defrauding the court.

During this period, a debtor is also required to take a pre bankruptcy credit counseling course approved by the US trustee for their district.  These courses are available in person, via phone, or over the internet, and usually cost $50.  Also, all attorney’s fees must be paid prior to filing, and the debtor must have means to pay the Bankruptcy Court a $299.00 filing fee.  The Court may waive this filing fee for extremely low income debtors, and may also allow a debtor to spread out the filing fee over several months.  Once this is all lined out, the bankruptcy attorney’s office will prepare the bankruptcy petition.

Filing

Once the petition is prepared, all fees are ready to be paid, all documents submitted, and the pre bankruptcy credit counseling course has been taken, the debtor will generally meet with their attorney to sign the petition, and the lawyer will file for the debtor electronically.  Once the petition is filed, the automatic stay goes into effect, which forbids creditors from pursuing any further collection activities against the debtor or his property.  The court will then (within a couple of weeks) send notice of the automatic stay to creditors, and schedule the ‘meeting of creditors’ (also known as a 341 meeting) around a month or so after filing.

The Meeting of Creditors

The Meeting or Creditors is really a meeting for the U.S. Trustee to get a look at the debtors documents, inquire into any irregularities in the petition, and dig around for any potential irregularities.  The debtor MUST attend the meeting of creditors.  The creditors are not usually required to attend, and most often do not, but if they do appear, they also get to ask questions and inquire into the general financial situation of the debtor.  At least seven days prior to the meeting, the debtor must give the trustee a copy of the current year’s tax return, and then bring certain documents to the meeting, including recent bank statements, photo ID, and proof of social security number.  The trustee may require other documents to be presented as well.

After the Meeting of Creditors

After the Meeting of Creditors, the Trustee and creditors generally have 30 days (except in cases of alleged fraud by the debtor) in which to object to the list of exemptions which the debtor has listed.  If an objection occurs, it may be resolved out of court, or it may require a hearing before the bankruptcy court to resolve.  Also, following the Meeting of Creditors, the Trustee will seize any non-exempted assets which he feels he can sell for the benefit of creditors, however, in the vast majority of Chapter 7 cases, the Trustee involved finds no assets of worth, and will file a report with the court saying so within 60 days of the Meeting of Creditors.  The debtor must also complete a second court approved class on managing their finances, and submit proof of taking this course within 45 days of the Meeting of Creditors.  Like the pre-filing credit counseling briefing, these courses are available in person, online, or over the telephone, and generally cost around $50.

Discharge

Assuming  the debtor has assets worth taking and no bad things happen, such as: an objection to the debtors exemption schedule; failure to provide proof of the personal finance course being taken; or a number of other potential snafus; a discharge is generally granted around two to three months after the meeting of creditors.

Remember:  Some debts cannot be discharged in a Chapter 7 bankruptcy, including most family support obligations, most student loans (with very few exceptions), some taxes, most fines and penalties issued by government (or any court), debts owed due to a DUI incident, debts that the court decides were incurred fraudulently, damages to others or their property that the court decides were intentional, debts that the debtor did not list on the bankruptcy petition schedules, and some other sorts of debts.

Many people are surprised by how straightforward this process can be with the right attorney behind the wheel.  Of course there are no guarantees.  Sometimes things don’t work out, and you and your attorney may have to go to a hearing, and you might lose, but most Chapter 7 filers only make one appearance with their attorneys, lose no property, and get a fresh start with minimal muss.

Reasons to file bankruptcy under Chapter 7

Income below state median, or able to pass the means test.

No assets in excess of chosen exemption schedule that debtor wishes to keep.

A desire to wrap up financial affairs quickly, and claim a fresh start asap.

No home that debtor wishes to keep.

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Would you like to learn more about Chapter 7 bankruptcy?  Speak to a Washington bankruptcy attorney!

If you are a resident of King County, Snohomish County, or Island County, Washington, you can speak with a professional who understands your situation.  Contact me to schedule a consultation to see if bankruptcy is the right choice for you.  There is no obligation, and no pressure.  I have evening appointments available.