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Overview of Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is the shortest, simplest type of bankruptcy an individual can file.  In most cases, a Chapter 7 only lasts 90 days from the day an individual (or married couple) files the case until the day it is discharged. Because of its short duration, a chapter 7 bankruptcy is usually the cheapest form of bankruptcy an individual can file.

Who Can File a Chapter 7 Bankruptcy?

Individuals, married couples and businesses are all potentially eligible to file a chapter 7 bankruptcy.  However, in this post, I will only cover individual, non-business filers.  Also, throughout this article, the terms “individual” and/or “debtor” covers both a single person filer as well as married couples filing together.

The basic qualifications to file a Chapter 7 are: (1) an individual makes below-average income, and (2) the filer must have no disposable income with which to make any meaningful payments to his creditors.

As to issue #1, the method used to determine if someone is below average is referred to as the “Means Test.” In short, the Means Test is a form that calculates an individual’s average yearly income based upon his previous six months of earning (i.e., it adds up the last six months of pay and then doubles it). If the product of that calculation is below average for household the size of the debtor’s then the debtor can file a chapter 7. If a debtor makes above average, then the presumption is that the debtor cannot file a Chapter 7 bankruptcy and must instead file a Chapter 13.

For example, if the person filing is married and has one child then he lives in a household of three. At present, the average income for a three-person household in Missouri is $72,543 (before taxes). So, if the person makes under $72,543 then he is free to file either a Chapter 7 or a Chapter 13 – it is his choice. However, if the individual makes ABOVE $72,543 then the Bankruptcy Code says that he should NOT be allowed to file a chapter 7.

Because the means test is backward-looking (i.e., it is calculated based on your past income), it can result in odd outcomes. For instance, if you had a job paying $100,000 per year and were just laid off, then the means test will say you are still making $100,000 per year (when in fact you are making zero).  In such cases, it is possible to “rebut” the presumption that you should file a chapter 13 by showing that the means test is not a true representation of your income going forward. Also, in some cases, it is possible for a debtor who makes slightly above the average income to still qualify for a chapter 7 bankruptcy based upon their monthly expenses. 

Suffice to say, the means test is complex. However, if done correctly it does not impede most people who wish to file a Chapter 7.

As to issue #2, if an individual’s budget (i.e., how much he brings home every month vs. how much he has to spend every month) shows a surplus, then this too could force him out of a Chapter 7.  This is true even if the means test shows that the individual makes below-average income. However, I have found that if someone provides me with a budget that shows they have money to spare every month, then they have miscalculated something. 

Bottom line, most people who are considering bankruptcy will qualify to file a chapter 7 bankruptcy if they wish to.

What happens when I file a Chapter 7 Bankruptcy?

As soon as you file a Chapter 7 bankruptcy, an “Automatic Stay Order” goes into effect.  The Automatic Stay is an order issued to your creditors telling them to stop trying to collect from you.  So, whatever a creditor is doing to you before the case is filed (phone calls, lawsuits, garnishments, etc.) they have to stop the moment you file. The automatic stay will also, temporarily, stop a foreclosure.  However, if you are trying to totally stop a foreclosure and remain in your home, then a Chapter 13 would be a much better option.

Do I have to go to Court?

You will have to attend a meeting called a 341 Meeting (also referred to as a “Meeting of Creditors” or a “Trustee’s Meeting”).  In some jurisdictions, this may be in the Federal Courthouse, although here in Jasper, Newton and McDonald counties it is held in the basement of Memorial Hall in Carthage, MO.  This meeting is basically a question-and-answer session where you meet with the Trustee and he asks you questions under oath regarding your bankruptcy forms. It is NOT a trial.

What’s a Trustee?

A Trustee is an administrator tasked with determining if your schedules (i.e., the bankruptcy forms you filed) were filled out accurately and completely.  He also has to determine you have any assets that can be sold to pay off some of your debts.

Will the Bankruptcy Court will Take my Property?

There is always the possibility that a debtor may lose an asset in a Chapter 7 bankruptcy. However, in the 20 years I’ve been practicing I have only seen a tiny percentage lose anything. One reason for this is that most people filing a Chapter 7 bankruptcy do not have any property worth taking.  Also, debtors may “exempt” certain property from the Trustee (i.e., keep him from taking it). Exemption rules are complex and vary from state to state.  Therefore, I can’t make any statements here about what any one person could or could not lose in a Chapter 7.  The only way to know for certain if you can file a chapter 7 without losing anything is to meet with an experienced bankruptcy attorney and go through your circumstances with him.

What happens to my Debts?

At the conclusion of your Chapter 7, you will receive a “Discharge Order” which essentially says you no longer owe your creditors anything. However, there are different debts you can have, and they are treated differently by the discharge order.  The two primary types of debts are: (1) Secured Debts; and (2) Unsecured Debts.

A Secured Debt is a debt that is tied to property that can be repossessed or foreclosed on if you fail to pay the loan (such house a house or a car loan). For these types of debt, you must make a choice: if you wish to keep the property, then you must also keep the debt and keep making your normal payments (this is called reaffirming the debt); if you wish to get rid of the debt, then you must give the property back to the Leander (this is called surrendering the debt); finally, if you can pay the fair market value of the property off in one lump sum, then you may do what is known as “redeem” the property.

Of course, most people filing bankruptcy do not have the money to pay a house or car off in one lump sum. So, redemption is rarely a true option. Rather, if you wish to keep the property, then your only genuine option is to reaffirm it – which means nothing changes for that debt–you keep on making the same payments with the same terms that existed before you filed the case.

In terms of Unsecured Debts, these are debts that are NOT tied to property (such as credit card bills and medical bills). These types of debts are simply wiped out in the bankruptcy (i.e., you do not owe them anymore and your creditors cannot even ask for the money anymore). However, there are a few exceptions–you cannot discharge student loans, most taxes, alimony, child support, debts related to hurting someone while driving drunk and other criminal fines and penalties. Concerning student loans and taxes–as a rule, they are not dischargeable but at times they can be–this is a complex topic I will leave for a future post.

So, that is a broad overview of Chapter 7. It is a very complicated process and this post is not a substitute for speaking with an attorney. Call the Garner Law Firm today and let us help you make a fresh start.

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