Summary: Chapter 7 bankruptcy is what many people think of when they think of bankruptcy. In most cases, all of a debtor’s property is exempt and protected. There are income guidelines and you usually must qualify to file Chapter 7 bankruptcy. There is usually only one hearing to attend which is held twenty to fifty days after the case is filed. A discharge of debts is ordinarily received about two months after the hearing. In the typical case, the whole process generally takes three to four months after filing.
Chapter 7 Bankruptcy – How It Works
Do You Qualify to File Chapter 7 Bankruptcy?
Chapter 7 bankruptcy usually requires that you qualify by passing a means test. If you have the ability to pay a significant portion of your unsecured debt, you may not qualify for Chapter 7 bankruptcy.
Preparing Your Case
The first step in filing a Chapter 7 bankruptcy is to provide information and documentation needed to prepare the bankruptcy petition, along with schedules and statements. You can check out the official forms published by the United States Courts. It is helpful to imagine this paperwork as a complicated tax return that summarizes income and assets.
Everyone who files Chapter 7 bankruptcy is required to take credit counseling from an approved agency. After you review and sign the completed bankruptcy documents, the attorney files them with the bankruptcy court. This begins a process that lasts three to four months.
Filing the Petition
Filing the petition (the bankruptcy paperwork) is done electronically with the Court. The case is assigned a case number upon filing, and the automatic stay is in place in most cases. The automatic stay is powerful — like a legal umbrella of protection from creditors provided by the court. If you have previously filed bankruptcy, the automatic stay may need to be extended or imposed. The automatic stay may not apply to certain creditors.
341 Hearing aka Meeting of Creditors
Within a few days of filing, the Court will set a date for the “341 Hearing.” The procedures and location of your hearing depend on the division your case was filed in. The hearing is usually 3-5 weeks after filing the case. In the Eastern District of Texas, two to four hearings every 15 minutes are scheduled. With the exception of complex business cases or problem cases, the hearings are short. The trustee has reviewed the paperwork ahead of time and understands your case. An experienced bankruptcy attorney knows what the trustee needs and provides this in advance to the trustee. Accurate paperwork enables the hearings to move at a fast pace since the Trustee has verified the case information ahead of time. If he has questions about assets or income, further information must be provided.
The Discharge Order
After the hearing, there’s not much to do but wait. Secured debts, such as a vehicle or home, require reaffirmation in order to keep the secured collateral. Creditors and or the U.S. Trustee may object to the dischargeability of certain debts or to the debtor obtaining a discharge. If no objections are filed, in about 60 days after the hearing, the Judge will sign the Discharge Order. If no assets are being administered, the Bankruptcy Court will close the case. This Order is the final order which legally declares most debts uncollectible. After bankruptcy, your credit report should reflect a zero balance on discharged accounts. Some debts can’t be discharged, such as recent income taxes, child support, alimony, fines owed the government, and most student loans.
Chapter 7 Bankruptcy Costs
The cost to file a Chapter 7 bankruptcy depends on how complex the case is and whether problems are anticipated. The Court currently charges a filing fee of $335. In addition to the filing fee, our Chapter 7 attorney fees generally range from $1,500 to $2,500, with the average cost being about $2,000 for attorney fees. At the initial consultation, we can usually give you a firm quote after knowing more about your case.
Pros and Cons of Chapter 7 Bankruptcy
Advantages of Chapter 7 Bankruptcy
- Chapter 7 bankruptcy is usually the cheapest bankruptcy!
- Fastest — a typical Chapter 7 bankruptcy lasts about 90-120 days.
- In the right case, may be an excellent tool for a fresh start when an individual has a large amount of unsecured debt, such as credit cards, medical bills, or signature loans.
- Can get rid of secured payments where the payment is too large, like an unaffordable car or house payment if you give up or surrender the collateral.
- There are certain types of secured debts where there is a lien against property where the lien can be removed in a Chapter 7 bankruptcy. For example, some loans are made by finance companies where the borrower gives the lender a lien against household goods. This type of lien can be removed and the debt discharged.
Disadvantages of Chapter 7 Bankruptcy
- Chapter 7 bankruptcy cannot help catch up on a delinquent mortgage, car or other secured item that a person intends to keep. Generally, the debtor needs to be current on secured debt if he wants to keep the collateral. Chapter 13 bankruptcy may be used for catching up on secured items.
- Chapter 7 bankruptcy cannot change the terms of a mortgage or car loan. Changing mortgage terms may be done through a loan modification, and sometimes, with the right facts, in a chapter 13 bankruptcy.
- A individual must “qualify” for a Chapter 7 bankruptcy. Earning very high wages may disqualify you from a Chapter 7 bankruptcy depending on your expenses and the type of debt you have.
- Stays on a credit report for up to ten years, but there is life after bankruptcy and action you can take to improve your credit score after bankruptcy.
Getting Rid of Debt in Chapter 7 Bankruptcy
Unsecured Debt, Such as Credit Cards, Loans Medical Bills
Chapter 7 bankruptcy is really great at dealing with unsecured debts (like credit cards, loans, and medical bills) and secured debts the individual does not want to keep (like an unaffordable mortgage or auto loan). The Chapter 7 Bankruptcy Discharge makes these debts uncollectible.
Secured Debts Where You Need to Keep the Collateral, Such as Car Loans, Home Loans
With secured debt in Chapter 7 bankruptcy, you may keep the item, but you have to pay for it according to the contract. The debtor is usually required to reaffirm a secured debt. Chapter 13 bankruptcy may help more when taxes, student loans, or domestic support obligations are the biggest problem. Chapter 13 bankruptcy may be better if you need to catch up on a car loan or home. Chapter 7 will not change the terms of a mortgage or auto loan, but it will allow you to keep your home or car and continue paying according to the contract. With personal property, a Chapter 7 debtor may be able to redeem the property by filing a motion to pay the value of the property in a lump sum, rather than what is owed.
Discharging Taxes in Chapter 7 Bankruptcy
In most situations, Chapter 7 bankruptcy prevents tax liability known as “cancellation of debt” income where your creditor sends you a Form 1099 for “charged off” debt in the same year or after the bankruptcy is filed. Discharge of certain debts, such as rental property, may have tax consequences.
Some taxes can be discharged. depending on the type and age.
Student Loan Discharge in Chapter 7
In very limited circumstances, student loans can be discharged where there is extreme hardship.
Protecting Property in a Chapter 7 Bankruptcy
Congress has designed bankruptcy to be a “fresh start.” You get to keep basic assets in order to get back on your feet on the flip-side of bankruptcy. Property can be protected by what are called exemptions.
Bankruptcy exemptions are a subject full of confusion and misinformation. There are many myths associated with the question of what personal property and assets are protected when a bankruptcy case is filed. An attorney needs to review your assets and how title is held and will advise you before filing if any assets are at risk.
Most people get to keep all of their property in a Chapter 7 bankruptcy. You use exemptions to keep property, including your home and cars. There are limits on exemptions and specific rules that can affect your ability to keep property that your attorney will evaluate and discuss with you. Generally, 401k’s, IRA’s, pensions, insurance proceeds are also exempt. According to the National Association of Bankruptcy Trustees, about 90% of Chapter 7 bankruptcy cases are known as “no-asset” cases, meaning there are no assets to be liquidated by the Trustee. Texas has very generous exemptions. Consulting a bankruptcy attorney early and doing pre-bankruptcy planning to determine what exemptions are available to help you protect your property is critical.
Voluntarily Giving Up Property in a Chapter 7 Bankruptcy
You may want to surrender back collateral. But usually, this is not a required. Giving up, or “surrendering” property can be a blessing if a loan has become unaffordable, and the secured item is not essential. Frequently, people surrender a home or a motor vehicle where there is no equity and the payment is too big for their current income situation. The entire debt will then be discharged, and the creditor cannot collect on the debt. Further, following bankruptcy, the creditor must report the account as having a zero balance on a credit report.
Your Next Step to Debt Relief
If you are struggling with debt, consult with an attorney who can give you guidance on options available to you. Each case is different and consultation with an attorney knowledgeable about the law as it applies to your particular circumstances is an important first step in resolving debt.
Read More About Chapter 7
- Chapter 7 Bankruptcy 341 Hearing Locations
- Chapter 7 vs. Chapter 13
- Credit Card Debt Relief
- Qualify for Chapter 7 Bankruptcy
- Reaffirmation Agreements and Secured Debt in Chapter 7
- Redemption of Secured Personal Property
- Void Judgments Against Homestead
- Void Liens Against Household Goods
Read More About Bankruptcy and Debt Relief
Chapter 7 – Usually the cheapest and fastest type of bankruptcy, Chapter 7 can wipe out credit cards, medical bills, and loans.
Chapter 13 – Does everything that Chapter 7 does, but with the added benefit of being able to help catch up on past due mortgages, car payments, and taxes.
Taxes – If you owe money to the IRS, there may be several different options for you, including some non-bankruptcy options.
Student Loans – There are many solutions to student loan issues, including getting a better payment plan, curing a default, and even loan forgiveness.
Debt Lawsuit Defense – When a creditor sues you over a debt, you can respond with a defense, which may allow you to win the lawsuit.
Loan Modifications – A special agreement between you and your mortgage lender might help you with a past due mortgage loan.
Debt Library – More in-depth articles on some of the more detailed areas of bankruptcy and debt relief.