Chapter 7 Bankruptcy The Straight Story
In my last article I went over for you the basics of bankruptcy and briefly described the two most common types of bankruptcy used by individuals. Now I am going to spend some time focusing on the number one most common type of bankruptcy; the Chapter 7, which is sometimes referred to as the Straight Bankruptcy. This type involves a liquidation of assets and a distribution of repayment to creditors.
Although the number of debtors choosing chapter 13 has increased since the enactment of the Code, still chapter 7 continues to be the number one choice. According to statistics, in 2014, there were 936,795 bankruptcy filings in the United States, 70% of which were chapter 7.
Who Is Eligible For Chapter 7 Bankruptcy?
There are certain requirements which must be met in order to be eligible for a chapter 7 filing.
In order to file, you must:
– Be a resident of the United States or own property or a business in the United States
– Receive credit counseling within 180 days prior to filing your chapter 7
– Be subject to a “means test” to determine whether your income is below the median level, unless your income is below the Arizona median
– Not have received a discharge from a prior chapter 7 bankruptcy within the previous eight years or from a chapter 13 bankruptcy within the previous six years
In addition to these requirements, other limitations may apply. For example, you are not eligible to file a petition if, within the preceding 180 days you were a debtor in bankruptcy proceedings and your case was dismissed because you willfully failed to follow orders of the court or willfully failed to appear before the court when you were expected to do so, or if you requested and received a dismissal of a bankruptcy case.
Keeping all this in mind, eligibility for filing a petition does not guarantee that you will receive a discharge. However, out of the thousands of petitions filed, we have never failed to receive a discharge for our clients.
Credit Counseling Requirements
The 2005 amendments to the Code added a new eligibility requirement for all individual debtors seeking relief through chapter 7. Section 109(h) states that, “a debtor shall not be eligible for discharge if he or she has not received a briefing from an approved nonprofit budget and credit counseling agency within 180 days prior to filing. The agency providing the briefing must be one that has been approved by the United States trustee or by the bankruptcy administrator .”
This may sound overwhelming, but the counseling is simply a one-hour long class which you can take online at your convenience and which we will arrange for you. During this session, a budget will be prepared taking into account your income and expenses. Based on this budget, the agency will review possible options for you and, in most cases, will confirm that there are not any realistic options outside of a bankruptcy petition.
In rare cases, there will be an exception made to the counseling requirement as described in section 109(h)(4). That section permits the court to waive the requirement under the circumstances that the individual is incapacitated, disabled, or on active military duty in a combat zone. The section is clear that the incapacitated or disabled person must be so to the point that he or she is incapable of making rational decisions regarding their finances or unable to participate in the counseling briefing.
The Means Test
As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 which became effective on October 17, 2005, a “means test” was instituted to determine whether or not a debtor is entitled to a Chapter 7 discharge, or whether such debtor must convert the case to one under another chapter of the Bankruptcy Code. The basic purpose of the means test is to compare monthly income and expenses to determine whether or not a Chapter 7 discharge would constitute an “abuse” of the provisions related to Chapter 7 in the Bankruptcy Code.
If your income is higher than the Arizona median you will need to complete the means test calculation to determine if you can pay back a portion of your unsecured debts through a Chapter 13 bankruptcy. There are, however, some exemptions. If your debts are not primarily consumer debts then you are exempt from the means test. You are also exempt from the means test if you are a disabled veteran and incurred your debt primarily during active duty or performing a homeland defense activity.
If your currently monthly household income is less than the Arizona median income for a household of your size there is a presumption that you pass the means test and are eligible to file a Chapter 7 bankruptcy.
The Bankruptcy Forms
First of all, I want to assure you that although this list of forms may appear daunting, as your attorneys we will prepare all necessary paperwork to ensure that it is completed correctly and that it will be accepted by the court, the trustee, the creditors and the United States trustee. After hiring our firm, we will provide you with a short workbook and a list of documents which we will need in order to prepare your petition, statements and schedule.
After receiving your documents and completed workbook, we will begin preparing the following forms and paperwork:
– a three-page petition along with your Social Security number or lack thereof
– the debtor’s statement of affairs and schedules
– a statement of current monthly income and means test calculations if applicable
– a disclosure of attorney fees
– copies of “payment advices” from employers
– a certificate from the credit counseling agency evidencing completion of a pre-petition credit counseling briefing
– a statement of intention with respect to property securing consumer debts
Additionally, if you have an interest in an education savings account, a record of that interest must also be filed. A typical package of bankruptcy paperwork is 30-50 pages in length. After your paperwork is complete, you will review and sign all of the documents.
Soon after filing your petition, you should receive an automatic stay which prevents further attempts by creditors against you or you property with respect to any claims, except in a bankruptcy courtroom. The stay gives instant relief from some of the more stressful parts of overwhelming debt, like harassing phone calls, wage garnishment and repossession.
Within a few weeks of filing, the court mails a notice to creditors informing them of the stay and of the date and place set for the meeting of creditors. This meeting is normally set between twenty-one and forty days after filing the petition and must occur at least twenty-one days after the notice.
The notice also contains deadlines for creditors who wish to file claims, objections to exemptions, or objections to different aspects of your petition. For example, creditors are allowed sixty days after the first date is set for the meeting of the creditors in order to file complaints objecting to a discharge or to request determination of certain dischargeability issues. They are also allowed thirty days after the conclusion of the meeting of the creditors to object to exemptions you have claimed.
The meeting of the creditors (section 341 (a) of the Code) is the first and often the only time in which you will be required to appear at a hearing. The purpose of the meeting is to give the trustee (the person appointed to administer your bankruptcy estate) and the creditors a chance to go over your case and to question you. The trustee uses this time to gather information that he or she will need in order to perform the trustee’s duties. Prior to the meeting, the trustee will need to be provided with your income tax return in order to be prepared for the meeting and to familiarize himself with your case.
On the day of the meeting of creditors, you will be required to present certain documentation, such as:
– a government issue photo ID card or other personal identifying information establishing your identity
– your Social Security Card or a written statement that such a document does not exist
– evidence of your current income, such as pay stubs or bank statements
– copies of statements from depository and investment accounts covering the date of your petition
-documentation of monthly expenses
Contrary to what the name would have you believe, creditors rarely are present at the meeting of creditors in a consumer bankruptcy case. Occasionally creditors will attend in order to ask questions or even to coerce debtors to enter into inadvisable reaffirmation agreements. Typically, however, the meeting is a very quick, simple hearing between the debtor, your attorney and either the interim trustee or the United States trustee.
Generally, at the meeting, the trustee will cover most of the information in the statement of affairs and schedules. The bankruptcy judge is not permitted to attend the meeting so as to prevent her from being influenced by any information that is shared there.
During the meeting, the trustee is also required to make sure that you are aware of certain factors, such as:
– the potential consequences of seeking a bankruptcy discharge
– its effects on your credit history
– your ability to file under a different chapter of the Code
– the effect of receiving a discharge
– the effect of reaffirming a debt
Most trustees will give this information in writing and confirm that you have read it. All in all, the meeting of creditors typically lasts five minutes but can take up to about thirty minutes depending on who attends and the number of questions they ask.
After the Meeting of Creditors
What happens next depends largely upon whether or not you have assets which are not exempt or encumbered and if so, they would be available for unsecured creditors.
Unless someone successfully raises objections, you will keep all the property which you claimed as exempt. As part of your filing, you were required to list all of the property you were trying to keep out of the bankruptcy process. This is often referred to as exempt and excluded property.
Property that is excluded includes things such as retirement accounts or education savings accounts. Property that is exempt is personal property that you keep after bankruptcy so that you can get a fresh start. This includes but is not limited to items such as clothing, furniture, a home or car. There are limits on exempt property.
As part of the bankruptcy process after the meeting of creditors, your creditors or the trustee can raise an objection to property you are claiming is exempt or excluded. If no one raises an objection, then you are allowed to keep all of the property you listed in your filing.
If you have property that is either above the maximum limit for exempt property or is not exempt from bankruptcy, the trustee can make a choice as to whether he or she will take possession of the property to convert it to cash. For example, it may be that your clothing is worth more than the $500 allowed under Arizona law. Perhaps you have items that take the total to $600.
Legally, the trustee can take the clothing that is worth the additional $100. But the cost of taking the property and converting it to cash may not make it worthwhile. So if the trustee closes your case and does not require you to turn over the property, you get to keep it. The trustee has legally “abandoned” the property and it goes back to whomever owned it prior to the bankruptcy filing. The decision to abandon property is final.
Liquidation of Nonexempt Property
If you have assets which are not exempt and also are valuable enough to make it worthy of liquidating, they must be turned over to the trustee at or after the meeting of the creditors. The trustee will then collect any other property belonging to the bankruptcy estate that is not exempt or abandoned and liquidates the estate, converting it to cash. This is usually done by either private sale or public auction. The trustee is required to give twenty-one days notice before the sale in order to give you an opportunity to pay their value if you are able. During this process, the trustee will receive and evaluate claims from creditors and determine if they are fair and true.
The Final Steps
It is at this point that the trustee is in the position to distribute “dividends,” or your liquidated assets, to your creditors who have valid claims and in the order of priority according to the rules set out in the Code. After this, you will typically receive your debtor’s discharge, or fresh start.
Because our bankruptcy attorneys have decades of experience with Arizona Chapter 7 bankruptcys, we encourage your to sit down with us to discuss your case. We can answer any questions you might have and give you the best advice to ensure you retain as much of your property as possible during your bankruptcy. Call our office to set up your consultation.