Chapter 7 Bankruptcy Attorneys
Chapter 7 Bankruptcy at a glance:
Some typical benefits of Chapter 7 relief in most cases are as follows:
- It’s quick, there are no lengthy plan payments to follow
- Your unsecured debts are discharged in 4-6 months
- Your credit card debts are erased
- Your medical bills are erased
- You can retain your home and car and other personal property
- Temporarily suspends a foreclosure action against your home
- Civil lawsuits or judgments against you are stopped and/or dismissed
- Stops all wage garnishments and bank account attachments
- Stops creditors from continuing to make harassing calls about your debts
- No repayments to unsecured creditors or debt consolidation agencies
- You can even discharge reinstatement fees assessed by the BMV
- Can qualify for new credit almost immediately after filing
Chapter 7 Bankruptcy Drawbacks:
- Secured creditors can continue with a foreclosure or repossession of your property after requesting and receiving permission or “relief of stay” from the bankruptcy court
- The bankruptcy remains on your credit report for 10 years
- You cannot discharge most student loans, income tax liens, child support arrearage or alimony obligations
- You can only receive a Chapter 7 discharge once every 8 years
- You have to pay all your attorney fees and filing costs before filing
- You may have to pay something to unsecured creditors if you have non-exempt equity in property
- You may have to give up all or part of your tax refund(s)
Most people consider bankruptcy as a last resort option. However, many times bankruptcy is either the only option or the cheapest option in the end. You have four basic options when you find yourself in financial distress:
- Do nothing about the debts and hope they go away (they never do)
- Try to negotiate your debts with your creditors (typically they won’t)
- Retain a debt broker or debt consolidation agency to devise a repayment plan for paying off your debts (You’ll spend more money than you need to, and if you miss a payment during this type of repayment plan you are terminated from the plan and your creditors are free to legally pursue you for the debts. Your creditors can also “1099” you for any debt they did not collect on and you will have an IRS tax obligation to pay).
- Consult a bankruptcy attorney and file bankruptcy (Filing bankruptcy is not cheap, but when compared to making monthly debt consolidation payments over a number of years, you will have avoided paying thousands more in the end by filing bankruptcy).
Chapter 7 Bankruptcy Basics:
Chapter 7 is the most common bankruptcy to file. People generally will look to Chapter 7 when they have suffered some major medical injury, have lost a job, are having wages garnished, or are simply struggling to make ends meet, and/or they have a number of creditors suing or threatening to sue them, or are facing a foreclosure of their home or a repossession of a vehicle.
The basic idea behind Chapter 7 is to eliminate unsecured debts and allow you to get a fresh start financially. In a typical Chapter 7 case, your unsecured debts are wiped out and are not repaid to creditors. Unsecured debts are those debts where you have not pledged your property as collateral to obtain a loan or make the purchase on credit. Examples include most credit card bills, medical bills, signature loans, and money judgments against you.
Secured debts are those debts where you have pledged the property as collateral. Examples include an auto loan or a home mortgage. In Chapter 7, secured debts are dealt with in one of three ways, depending on whether there is a loan or lien on the property, or if there is a lot of equity in your property. First, you can reaffirm or continue with paying on the current debt, provided the creditor elects to accept your payment. This will allow you to keep the property that is secured by the debt. However, in reaffirming a debt, you are in fact removing the debt from bankruptcy. Meaning, you and the creditor would have the same rights and liabilities as you both did before the bankruptcy, and if you default thereafter, you could not only lose the secured property, but also be liable for any deficiency on the unpaid balance for that debt. Second, you can surrender or give up the collateral to the creditor or trustee and then have any outstanding debt owed converted to an unsecured debt and discharged. Finally, you can redeem the property, meaning if you have non-exempt property you can keep the property if you agree to pay the trustee a fixed amount for the value of the property.
When you file bankruptcy, all of your property, money, and assets are pooled into what is called the bankruptcy estate, and a trustee is assigned to oversee your bankruptcy estate. You could now consider the trustee to be a co-owner of all of your property and you cannot dispose of your property without the trustee’s permission during the duration of your bankruptcy case. The trustee’s job is to determine whether you have non-exempt assets that can be converted to money and then distributed to the creditors. Exempt assets are specified assets or equity in assets that the creditors and trustee cannot take from you at all. In other words, you are allowed to keep so much “value” of various assets and anything above the allotted value is subject to being taken from you to repay creditors. Each state has various exemption guidelines. Ohio’s is found under O.R.C. § 2329.66, which is being expanded and revised starting October 1, 2008.
There are a couple of factors that determine whether you are eligible to file under Chapter 7. The main factors are whether you have previously filed and received a discharge in a Chapter 7 bankruptcy within the last eight years, and whether you are over or under the median income level (or average income level based on the size of your family). Generally, if you have received a Chapter 7 discharge within the last eight years, you cannot file Chapter 7 again, but could possibly file under Chapter 13. If you have not received a bankruptcy discharge in the last 8 years and you are under the median income level, you are eligible for Chapter 7. However, if you are above the media income level, you are presumed not to qualify for Chapter 7 and you have to take an additional step of determining your Chapter 7 eligibility by going through what is referred to as the “Means Test”.
The Means Test is a test designed to determine whether you have extra income that could be paid to unsecured creditors. Simplistically, the test works by taking your monthly gross income and subtracting from that amount all necessary taxes, your monthly auto and mortgage payments, and all government designated local and national standards for averaged monthly living expenses. The number at the end of all this subtraction is supposed to be (theoretically speaking) the amount of disposable income you have available to repay unsecured creditors per month. If your Means Test number is below $109.58 you have tentatively passed the Means Test and can proceed in Chapter 7.
However, passing the Means Test for Chapter 7 does not mean you necessarily stay in Chapter 7. In Ohio, there are two additional hurdles one must clear before being absolutely sure you will remain in Chapter 7. The first is comparing your current net income with your average necessary monthly living expenses (which does not include any payments you may be making toward any unsecured debt). If the difference between your net income and your average monthly living expenses by $250.00 or more, there is a tendency for the U.S. Trustee to remove your case from a Chapter 7 and into a Chapter 13 because you appear to have extra disposable income that could be paid to unsecured creditors. The second is if you have a large amount of non-exempt equity in certain assets. If this is the case, then the local Trustee will devise a short repayment plan for paying back the non-exempt equity and this amount will be distributed to the unsecured creditors. You will still remain in Chapter 7 with the second option.
The Filing Process:
Once you have determined that you need or should file bankruptcy, you need to file what is referred to as the “petition”. The petition is made up of various documents designed to list and itemize your income, expenses, assets, liabilities, creditors, as well as certain financial transactions over the last two years.
After your petition is completed and filed, you will be assigned a Judge and Trustee, as well as receive your 341 hearing date, which will be held 30-45 days from the date your petition was filed. The 341 hearing is a meeting for the creditors and the trustee to ask you questions about your petition, your current income, and if there have been any changes in your situation since filing for bankruptcy. Creditors hardly ever show up for the hearing. You are under oath when you are attending this hearing. A typical hearing lasts 10 minutes.
The 341 hearing should be the only hearing you have to attend if your petition has been properly prepared and filed. Thereafter, if no creditor objects to your petition, you should receive a discharge between 90-120 days after the 341 meeting. If a creditor does object, or even if the trustee files an objection to something in your petition, most of the time the issue is worked out without having an additional hearing or delay.
Lastly, I want to point out that there is a huge difference between the options your secured creditors have regarding your secured property in Chapter 7 than in Chapter 13. In Chapter 13, your secured creditors have to give your a chance to continue making your monthly payments and make up arrearage. It is only after you miss payments while in a Chapter 13 plan that the secured creditor then has the option to petition the court to repossess or take back the property.
However, in Chapter 7 your secured creditors do not have to continue dealing with you once you have filed bankruptcy. As noted earlier, your secured creditors have the option of whether to work with you on letting you retain the property and continue accepting your payments, or repossessing the secured property. In most cases, they do continue to work with you if you are current or relatively current with your payments. Should your secured creditor decide to repossess the secured property, the creditor would still have to petition the court for permission to repossess the secured property. Of course, the secured creditor will almost always receive permission to repossess secured property.