Kenneth Carroll: When To File For Chapter 7 Bankruptcy?

Chapter 7 is also called straight bankruptcy or liquidation bankruptcy. It’s the type most people think about when the word “bankruptcy” comes to mind. In a nutshell, the court appoints a trustee to oversee your case. Part of the trustee’s job is to take your assets, sell them and distribute the money to the creditors who file proper claims. The trustee doesn’t take all your property. You’re allowed to keep enough “exempt” property to get a “fresh start.”

Preparing for Chapter 7

Before a case is filed, you’ll have to gather all of your financial records like bank statements, credit card statements, loan documents, and paystubs. You’ll use that information to fill out the bankruptcy petition, schedules, statement of financial affairs, and other documents that will be filed with the court. You can download copies for free from the website maintained by the U.S. Courts. Your attorney will use bankruptcy computer applications to produce them. Broadly, these documents include the voluntary petition for relief, the schedules of assets and liabilities, declarations regarding debtor education, and the statement of financial affairs. These documents require you to open up your financial life to the bankruptcy court. They include a listing of all of your property, debts, creditors, income, expenses, and property transfers, among other things. Once completed, you’ll file it with the clerk of your local bankruptcy court and pay a filing fee. If you’re interested in finding your local court, visit the federal court locator page, choose “Bankruptcy” under “Court Type” and add your location in the bottom box.

Credit Counseling

Almost every individual debtor who wants to file a Chapter 7 case has to participate in a session with an approved credit counselor before the case can be filed. This can be in person, online or over the telephone. The rationale behind this requirement is that some potential debtors don’t know their options. A credit counselor may be able to suggest alternatives that will keep you out of bankruptcy. You can get more information about this requirement on the website for the U.S. Trustee.

How the Means Test Affects Bankruptcy

A debtor must also successfully pass the means test calculation, which is another document that must be completed prior to filing for bankruptcy. This test, which was added to the Bankruptcy Code in 2005, calculates whether you are able to afford, or have the “means” to pay at least a meaningful portion of your debts. The means test compares your income with the median income for your state. If you fail the means test, you can only file Chapter 7 bankruptcy under very specialized exceptions. Your alternative would be to file a Chapter 13 repayment plan case. You can learn more about the means test and the numbers used in the calculation from the U.S. Trustee website.

Meeting of Creditors

After a Chapter 7 bankruptcy is filed, the court will issue a document giving notice of a debtor’s meeting of creditors. This notice is also sent to all of the creditors that are listed within the bankruptcy documents. During the meeting of creditors, the bankruptcy trustee will ask the debtor various questions about the bankruptcy, such as whether all of the information contained within the bankruptcy documents is true and correct. The trustee may ask other questions about a debtor’s financial affairs. If the trustee wishes to investigate the bankruptcy further, they may continue the meeting of creditors on a future date. It is important to note that at the meeting of creditors, as the name suggests, any creditor may appear and ask a debtor questions about his bankruptcy and finances. In reality, however, the only creditors who appear regularly are car creditors (to ask what you intend to do about your car payments) and the IRS (to ask when you’re going to pay back those non-dischargeable taxes).

Seizure of Assets

If you have any nonexempt property, the bankruptcy trustee has the ability to seize and sell the property. Exemptions refer to federal or state statutes that allow you to protect certain types of property when you file bankruptcy. For example, exemptions exist to protect retirement accounts, such as a 401(k) plan. Any assets that the trustee can recover are distributed to creditors. Before most debtors can receive a discharge, they will have to take a course in financial management. This class is likely taught by the same group that you used for the credit counseling. Plan to spend about two hours in person, online, or on the telephone.

Debtor’s Discharge

If the trustee and the creditors do not object to the debtor’s discharge, the bankruptcy court will automatically give the debtor a discharge at some point after the last day to object. The last day to file a complaint objecting to a debtor’s discharge is 60 days after the first session of the meeting of creditors. If no complaint is filed, the discharge is usually entered several days later. The discharge prevents creditors from attempting to collect any debt against you personally that arose prior to the filing of the bankruptcy. Thus, for all intents and purposes, the discharge effectively wipes out debts. However, it is important to note that not all debts are dischargeable, including certain taxes and child or spousal support obligations. Furthermore, a bankruptcy discharge is personal. This means that a creditor can still collect on a discharged debt from a co-debtor that did not file for bankruptcy. A creditor with collateral may also be able to use that collateral to satisfy some of that outstanding debt.

Bankruptcy Myths

Filing for bankruptcy can be a traumatic experience, particularly for people who believe some of the “myths’’ that supposedly surround the process. Some of the myths include:

• Losing Everything: Actually, the majority of Chapter 7 filings are “no-asset cases,” meaning the debtor gives up no possessions. The law allows you to retain basic assets necessary for day-to-day life, like your house, car, computers or other equipment needed for you to work. These are called exemptions. Beyond that, it’s likely that creditors won’t want the possessions that aren’t covered under exemptions.
• Relief from All Debts: As a general rule, debts you are deemed personally responsible for taxes, alimony, child support, student loans – won’t be forgiven. Some consequences can’t be erased.
• Paying off Debts Is a Better Decision: Maybe but maybe not. If your debts are more than 50% of your annual income and you can’t see a way to pay them off within five years bankruptcy is the best choice to achieve a long-term, debt-free life.
• Bankruptcy Is a Personal Failing: It’s not an admission of failure or a character flaw. Filing bankruptcy is a financial remedy, especially if unforeseen events occur in your life. Things like job loss, meltdowns in the real estate market and especially medical emergencies, aren’t easy to predict. The fact is, medical bills account for more than half of the bankruptcies in America.
• Bankruptcy Will Ruin Your Financial Future: Credit will be difficult to obtain. Yes, higher interest rates will be a given for the 10 years the bankruptcy is expected to remain on your credit report. But in time, there is a way back. Many people have prospered after taking the short-term hit that comes with filing for bankruptcy.
Pros and Cons of Filing Chapter 7 Bankruptcy
Deciding to file for Chapter 7 bankruptcy is a big decision that shouldn’t be taken lightly. There are pros and cons, which must be weighed carefully while studying your situation.
Pros
• It will prevent your lenders from aggressive collection action.
• Chapter 7 is easily understood and explained to curiosity-seekers and future lenders. Sure, there might have questions about bankruptcy and it will hurt your credit. But if you talk yourself out of Chapter 7 when it could be the right decision, consider a future of trying to explain your missed debt payments, defaults, repossessions and lawsuits. And yes, all of those will hurt your credit, too.
• You will be forced to be more disciplined financially. If you ever intend to borrow money again, you will need to be frugal and responsible about debt. Even though you might be able to open new lines of credit anywhere from one to three years after filing for bankruptcy, the interest rates will be much higher. Demonstrating ability to pay those debts on time is the only way to get the interest rates down.
• In many states, exemptions will allow you to keep many of the things you own, including more property than you probably need. After you file, you will be able to keep any salary you earn and any property you purchase.

Cons
• Your credit will take a severe beating. Chapter 7 bankruptcy can remain on your credit report for up to 10 years.
• You will lose all of your credit cards.
• You will lose property that you own if it’s not exempt from sale by the bankruptcy trustee.
• You likely will lose luxury possessions, like a boat or second home.
• It will be nearly impossible to get a mortgage if you don’t already have one.
• It won’t relieve you of student loan debt or obligations to pay alimony and/or child support.
• You can only file under Chapter 7 once every six years, but you can repeatedly turn to a Chapter 13 plan if there are more financial hardships and each filing will appear on your credit report.
• Bankruptcy court could convert your Chapter 7 case to a Chapter 13 bankruptcy. Instead of being free from most debts within four to six months, you might be required to repay your debts over the course of three to five years.

Requirements for Chapter 7 Bankruptcy

Here are five strong signs that indicate you qualify for bankruptcy:
• Your debts total more than half your annual income.
• It would take five years (or more) to pay off your debt, even if you took extreme measures.
• Your debt interferes with other essential aspects of your life, such as relationships and your ability to sleep.
• You have little to no disposable income.
• Your monthly income is below the median level in your state.
Under Chapter 7, there is no minimum debt limit (there are stipulations under Chapter 13). Every situation is different, but here are some factors to consider before filing for bankruptcy.
• Types of Debt: If you largely have unsecured debt (credit cards, medical bills, cash advance debts), bankruptcy could offer a respite from creditors.
• Employment: If you are out of work, bankruptcy could help you get rid of some debts and allow you to keep up with a mortgage or car payment.
• Non-Bankruptcy Options: For those with little income and few assets, bankruptcy may be unnecessary. The scenario of being “judgment proof” is when a creditor sues the person for repayment of a debt, but the person is unable to repay it because of limited finances.
• Cost to File Bankruptcy: For Chapter 7, there’s a filing fee, courses for Credit Counseling and Debtor Education and legal fees. Is the bankruptcy cost on par with these fees? If so, it may not provide much financial freedom.
To qualify for a Chapter 7 bankruptcy, the debtor must earn less than the state median income on a monthly basis and submit to a “means test’’ that examines their financial records, including income and expenses, along with secured (mortgages and car loans) and unsecured debt (credit card bills, personal loans, medical expenses). Certain non-essential credit purchases, designated as “luxury items,’’ might remain the debtor’s responsibility, although that can be appealed to the court.

Preparing for Bankruptcy

There’s some protocol to follow in the months before filing for bankruptcy. Failing to follow these instructions could undermine your efforts.
• Don’t Pay Creditors: It seems counterintuitive and you should definitely make routine payments. But any large or unusual payments could be viewed as “preferential transfers.’’ That means one creditor has benefitted unfairly over others.
• No New Debt: A new creditor could claim you took out a loan or ran up the balance on a credit card without intending to pay it back. Legally, that’s fraud and it will not be forgiven.
• No Unusual Transactions: Don’t stray from the routine. Don’t transfer titles of cars or homes. Don’t buy luxury goods. Don’t transfer your business or remove your name from it. They can all be classified as fraud.

• Be Truthful: You are required, while filing for bankruptcy, to provide full and complete information. You must disclose any debt, assets, accounts or other financial information. Failure to comply could lead to fraud and potential criminal charges.
• Don’t Touch Retirement Funds: You are generally allowed to keep retirement funds and accounts, so keep them safe while considering bankruptcy and don’t use those funds to pay down debt.
• Use Common Sense: You should not file for bankruptcy if you’re about to receive a large sum of money, such as an inheritance. You could use that money to pay down your debts. Otherwise, if you’re involved in a bankruptcy process, that money could be seized by a court representative to pay your debts. Never think you can get away with something sneaky or dishonest. Your bankruptcy lawyer is always a good resource for what you should and shouldn’t do.

Once you qualify to file for Chapter 7 bankruptcy, it will take up to four months to complete the bankruptcy process. The most important factor is finding an experienced and reputable bankruptcy attorney.

Chapter 7 Bankruptcy Lawyers Free Consultation

When you need legal help with a bankruptcy in Utah, please call Ascent Law LLC now at (801) 676-5506. We want to help you now. Come in or call in for your free initial consultation.