Understanding the Basics of Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as a straight or liquidation bankruptcy. In a Chapter 7 case all property of any significant value that is included in your bankruptcy is sold. Money from the sale of property is then distributed to whomever you owe money. At the end of the bankruptcy you (the debtor) receives what is a called a discharge.
When you receive a bankruptcy discharge you are no longer legally required to pay any debts that are included in the discharge. The discharge is permanent and prohibits your creditors from trying to collect on the debt, including any calls, letters, personal contact or legal action.
However, any property that is used to secure a loan, such as a car or house, which is not covered in your discharge, must still be paid back. If you are unable to pay back the loan, the bank or company can repossess or foreclose on the property.
There are several types of bankruptcy. Chapter 7 bankruptcies are the most popular for individuals. Close to 1.2 million people filed bankruptcy in 2012. Of those, over 800,000 individuals chose Chapter 7.
Many individuals who file Chapter 7 have “no-asset” cases. This means that all of their property is excluded or exempted from being part of the bankruptcy. No asset cases might also include property that is secured by a loan, such as a car or house.
Individuals filing Chapter 7 must meet certain eligibility requirements outlined by the law.
You must receive a credit counseling briefing from an approved non-profit budget and counseling agency within 180 days before filing. We discuss the credit-counseling requirement in greater detail later in this article.
Many people must also fill out a form to report their income and expenses. This is referred to as a “means test.” It ensures that individuals who have enough income to pay back their creditors don’t abuse the bankruptcy laws in Chapter 7.
In Arizona, your average monthly income over the last 6 months is compared to the median income in Arizona for a family with the same number of dependents as you have. If your income is greater than the median income, you will be required to fill out the means test.
Previous Bankruptcy and Eligibility to File
If you received a discharge within the last 6 to 8 years, depending on the type you filed, you cannot file a Chapter 7 bankruptcy.
Sometimes individuals will file bankruptcy and the case is dismissed for some reason. A previous bankruptcy filing doesn’t stop you from filing again. Since the court can dismiss bankruptcy cases, the reason for the dismissal may impact your ability to file again.
If within the last 180 days your bankruptcy case was dismissed because you chose to not follow a court order or to appear before the court you cannot file a bankruptcy case.
The other circumstance under which you could be ineligible to file a Chapter 7 has to do with the automatic stay. As soon as you file a bankruptcy case, your creditors are stopped from trying to collect any money that you owe them. This is called an automatic stay.
If your bank is threatening or moving to foreclose on your house, as soon as you file bankruptcy, the bank must stop any foreclosure proceedings. This also applies to credit card or collection agencies that may be harassing you with phone calls or letters. Even though the stay automatically comes into effect when you file, a bank or collection agency can ask the court to lift the stay.
If a creditor asked for the stay to be lifted and you then decided to ask the court to dismiss your case (called a voluntary dismissal) you can’t file a new Chapter 7 bankruptcy case with 180 days of the voluntary dismissal.
The purpose of this eligibility requirement is to keep people from abusing the automatic stay that is granted as soon as you file a bankruptcy case.
Finally, it is important to remember that just because you are eligible to file bankruptcy does not mean you will get a discharge of your debts. It just means that you can file a case, go through the bankruptcy process, and possibly receive a discharge for your debts.
Credit Counseling Requirement
As part of your Chapter 7 bankruptcy case you must receive credit counseling with an approved non-profit agency. Most attorneys will choose the agency their clients work with.
When you choose our firm to represent you in your bankruptcy, we will give you the information you need to complete the credit-counseling requirement. We include the cost of the counseling in our bankruptcy fees so you don’t have to worry about paying for this out of pocket.
If for some reason the credit counseling agency does not provide counseling in a language that a debtor can understand, you can make an argument that the requirement should be waived. The majority of credit counseling takes place over the Internet or by phone so you can complete the requirement from home.
As part of the credit counseling session you will be asked to prepare a budget that reviews your income and expenses. The counseling agency will review the options that you have available to you and ensure that bankruptcy is the best option given your circumstances.
It is preferable to do the credit counseling prior to filing your bankruptcy case. The only exception to the credit counseling requirement is if the person filing the bankruptcy is incapacitated, disabled, or on active military duty in a combat zone.
The Initial Bankruptcy Forms
At first the bankruptcy process seems like an endless maze of forms, requirements, and legal jargon. Especially when you are already feeling financial stress it can be overwhelming. This is a brief overview of the form you will fill out to help you feel at ease with the process.
The initial forms you file in a Chapter 7 case include the following.
- Statement that you completed the required credit counseling report
- Statement of your social security number (or lack of one)
- A list of your creditors and any other individuals to whom you have a financial obligation
You also pay a filing fee at the time you file for bankruptcy. If you are filing jointly with your spouse or as an individual you pay the same fee. You can submit your initial forms without the filing fee only if you apply to pay the fee in installments over the next 4 months or request a waiver of the fee.
You must also file the following documents. These can be filed at the same time or shortly after the documents listed above.
- A statement of affairs and schedules
- Current monthly income and means test calculation
- Disclosure of attorney’s fees
- Copies of paychecks from your employer
- Certificate of completion from your credit counseling
- A statement of what you intend to do with any property that has been used to secure a loan
- If you have education savings accounts you must file a record of these accounts and whom the accounts are for (child, grandchild, etc.…)
In our next post we’ll be discuss where to file, what happens after you file and the meeting of creditors.
If you have more questions about bankruptcy, we encourage you to call our office and set up a free initial consultation. These articles are meant to give you as much as information as possible about how bankruptcy works, but you may have specific questions in your case that need to be answered by one of our attorneys.