Chapter 7 In Detail: A Fresh Start
Chapter 7 is sometimes referred to as a “liquidation,” or a “total” or “straight” bankruptcy, because it is a process of liquidating non-exempt assets, if available, and eliminating most debts entirely. There are certain requirements that must be met in order to qualify Chapter 7 protection.
How Long Does It Take To Complete The Chapter 7 Process?
Generally, a Chapter 7 bankruptcy takes three months to complete from the time a “petition” is filed with the Court until a “discharge” is granted. In the Petition, a set of legal documents prepared with the help of your attorney, you will list all of your debts. These debts are classified as “secured,” “unsecured” and “priority.” If you have property that you have pledged as collateral, or “security,” for a loan, you will likely have the option to “surrender” the property and wipe out all debt associated with it, or you may keep the property and continue to pay for it by signing a reaffirmation agreement with the creditor. (See more detailed discussion about reaffirmation, redemption and surrender).
Will I Lose All Of My Possessions?
If you desire to keep certain personal property and you discuss this with the attorney, you will likely continue making payments directly to the creditor during the bankruptcy process and, of course, after your discharge. Upon filing, your creditors will receive notice of your case information, and they will receive information about which property you intend to keep.
Discharging Unsecured Debt
Instead of paying a Trustee under a repayment plan, like in a Chapter 13 bankruptcy, the goal of a Chapter 7 is to “wipe out,” or discharge, as much unsecured debt as possible.
Unsecured debt generally includes medical bills, credit card debt, overdraft bank charges, cash advances, check cashing loans and signature loans at banks or finance companies. Even if a creditor has filed a lawsuit and/or has taken a judgment against you, in most cases, these debts are considered unsecured and will be discharged as well. Exceptions may apply to judgment liens attached to real estate. Once you have consulted with your attorney and it is determined you will file Chapter 7, you will likely be advised to stop paying your unsecured debt.
Certain debts are not eligible for discharge in Chapter 7. Non-dischargeable debts include child support, most taxes less than three years old, student loans and criminal fines and restitution. There are very limited exceptions, but your attorney will explore your options and determine if any of these debts qualify for discharge by special exception.
What Factors Are Considered In Determining Whether Chapter 7 Is Right For Me?
There are many factors in determining whether you should or may file Chapter 7 bankruptcy. The main consideration will be to determine the goals you wish to accomplish by filing and what property you desire to keep. Many times your eligibility for a Chapter 7 is based on the equity you have in the property you own, your income or earning potential and your ability to repay your debt over a period of time. The New Client Questionnaire and the information discussed during your office appointment will allow Mrs. Randle to determine if you may file a Chapter 7 bankruptcy and reach the goals that you desire.
For example, if your goal is to keep your home or car, yet you have fallen behind on the payments with no expectation of quickly becoming current on the obligations, Chapter 7 is likely not right for you. Most creditors require that you are current on the debt, or have the ability to quickly become current, before they will allow you to keep the property after a Chapter 7; therefore, Chapter 13 may be a better option for you.
Assets And Equity In Property And Its Impact On Filing Chapter 7
The Chapter 7 process is designed to liquidate, or sell, items of value that you own outright or in which you have equity, so that any money obtained can be used to pay your unsecured creditors. Once your property has been “liquidated,” any remaining debt is eliminated, or discharged, in the Chapter 7. Therefore, Chapter 7 is ideal for debtors that have few assets or equity in property they own. For further clarification, an asset is anything of value that you own, or have an interest in, that could be sold and used to pay your debts. Equity is the value of an item on and above what is owed against it, if anything. In a typical Chapter 7 case, there are no assets to liquidate; therefore, no money is available to pay the unsecured creditors. If there are no assets, the debtor simply receives a discharge and no money is paid as a part of the bankruptcy case.
If you have assets or equity in property, you may still be eligible to file Chapter 7 based upon whether your property falls under an exemption. An exemption is a law that allows you to keep certain property away from the reach of creditors. There are exemptions that apply to your primary residence and different exemption amounts that apply to personal property, such as cash, savings, household goods and automobiles. Certain items of property have high, or even unlimited, exemption amounts. For example, qualified 401(k) retirement funds and most Individual Retirement Accounts, along with Social Security income typically have no limit on the amount that can be kept away from the reach of creditors. Further, personal property you use in your business may be subject to a separate exemption beyond other personal property you own.
Property: Keep It Or Give It Back
When you file a Chapter 7 case, you will sign and file a “Statement of Intentions” which indicates whether you desire to surrender or keep property that is subject to a loan. Your creditors will receive this notice; however, the statement itself is not binding and you may amend it or take legal steps in contrast to your original intent.
If you have indicated you wish to retain property, your creditor will likely prepare a Reaffirmation Agreement. This Agreement sets out the amount you are agreeing to repay, the interest rate and other repayment terms. This Agreement will be sent to our office or may be presented by a creditor representative at the meeting of creditors. Please note that most creditors will not reaffirm a debt unless you are, or quickly become, current on your loan before your case is discharged.
There are some creditors, however, that will allow you to begin making regular payments and will place the “arrearage” to the end of your note. Others may allow you to catch up over 3 to 6 months by paying additional sums above your regular payment. This is not typical, so make sure you remain current on your payments or have the means to become current before your meeting of creditors.
Please also note that creditors have the decision whether to reaffirm the debt; however, most creditors prefer to receive payments under a new binding contract than to receive used property that will likely bring less than what you owe. If you intend to keep property, you will continue to make regular payments according to the terms of your original contract unless they are changed by the Reaffirmation Agreement.
Effects Of A Reaffirmation Agreement
Once a reaffirmation agreement is filed with the Court, you have approximately 60 days to change your mind. You will not be refunded any payments you have made to the creditor during that time; however, you can return the property with no further liability on the debt. Again, any “deficiency balance” will be eliminated with your discharge if you do not sign a reaffirmation agreement or you rescind the agreement within the allowable time.
If you enter a Reaffirmation Agreement and do not rescind it before the deadline, you are bound by its terms. If you default on the loan in the future, the lender may repossess the property and sue you to collect any unpaid balance owed. Creditors can even garnish wages and take any other steps to collect against you.
Since this is a very serious undertaking, you will be provided ample information from your attorney and from the creditor to assist you in making the decision of whether to reaffirm a debt. Typically, unsecured debts are not reaffirmed unless special circumstances exist. You should discuss your desire to reaffirm an unsecured debt with the attorney and keep in mind that you can always make voluntary payments to anyone after your case is discharged.
Redemption: An Alternative For Keeping Collateral
Reaffirmation is not the only way in which to keep your property in a Chapter 7. If it benefits you, you might be able to redeem property. The option of redemption allows you to pay the creditor only what the property is worth and not necessarily what is owed against it.
For example, you wish to keep a vehicle; you owe the creditor $10,000.00, but the vehicle is only worth $5,000. You can reaffirm the debt and continue to make monthly payments until the loan is paid in full, or you can redeem the vehicle by making a lump sum payment of $5,000 to the creditor in full satisfaction of you repayment obligation.
The obvious disadvantage of redemption is that most debtors do not have the available cash to make a lump sum payment to a creditor. Although there are specific eligibility requirements, there are finance companies that will loan the amount needed to redeem your vehicle from Chapter 7. Hence, the redemption loan company pays your current creditor the value of the vehicle and you make payments in installments to the loan company. Please note that the interest rate for redemption loans is typically very high; however, many companies indicate that they will not make a loan unless it saves you money.
When Do I Have To Give The Property Back To The Creditor?
If the creditor has not repossessed the property prior to your case filing, you will likely have some time before you are required to surrender the property, especially if you are giving up possession of real estate. Once your case is filed, the automatic stay prevents creditors from taking steps to repossess the property without Court permission. The creditor must file a Motion for Relief from the Automatic Stay in order to legally repossess your property, even if you desire to give it back to them.
Further, the lender’s contract and lien documents (deed of trust or certificate of title) are subject to review by the Bankruptcy Chapter 7 Trustee. Typically, the Trustee will not review or release the creditor to repossess property until after the meeting of creditors, which is typically set four to six weeks after you file your case.
Once the Trustee and Court have given the creditor permission to repossess personal property, the creditor may take some time before picking up the property or they may decide to pick it up immediately at that point. If a mortgage lender is given permission to foreclose their interest, this simply allows the lender to continue or begin foreclosure proceedings in State Court, which can take three to four weeks and may sometimes take much longer. Although the time frame is not definite, you do not need to be concerned about surrendering real or personal property immediately upon filing Chapter 7. It is advisable, however, to maintain insurance coverage on the property until it is out of your possession and control.
Do I Make Too Little Or Too Much Money To File Chapter 7?
Unlike Chapter 13, there is no requirement that you have any income whatsoever in order to be eligible for filing Chapter 7, although lack of income may be a factor in whether you will be allowed to keep certain property if you cannot afford to make the required payments. Further, in Chapter 7, there is no set income cap or maximum; however, income is a factor in determining whether you are eligible to file Chapter 7 and receive a discharge of your debt. The Court examines gross income, or the amount you make before you pay taxes, health insurance or other obligations.
[If you are self-employed, certain reasonable business expenses will be deducted in determining your gross income] If you make more than the average person with the same number of dependants compared to others in your county of residence, you may be subject to more scrutiny than debtors that fall below those averages, but it does not mean you are not eligible to file a Chapter 7.
Another factor to be considered is your “disposable income,” which is the amount of money that is available to pay unsecured debt after you pay for necessary secured debt and your basic living expenses. Those individuals who have very little disposable income based on an “after bankruptcy” budget are likely candidates for Chapter 7.
How Long Do I Have To Wait To File Chapter 7 After Having A Previous Case?
You are only eligible to receive a Chapter 7 discharge once every eight years under the current law. The eight years run from the filing date of your prior case (or your original Chapter 13 filing date if that case was later converted to a Chapter 7) to the time you file a new Chapter 7 case.
Additionally, if you have received a discharge under Chapter 13, you are not eligible to receive a Chapter 7 discharge for two years. If you have filed a prior case, please advise Mrs. Randle during your appointment so that you can discuss your options. You may be able to file a Chapter 13 case until the time period has expired if you need to protect your assets.
Contact An Attorney To Find Out If Chapter 7 Is Right For You.
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