Filing Chapter 7 Bankruptcy for a Fresh Start
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is commonly referred to as a “fresh start” bankruptcy because a debtor can eliminate all dischargeable debt and there is no repayment plan. The cost to the debtor may be giving up assets to repay creditors, but bankruptcy exemptions may protect a debtor’s asset from creditors. For individuals, filing Chapter 7 bankruptcy may take around 90 days to complete the process. After the bankruptcy judge orders the debts discharged, creditors may no longer collect those debts from the debtor. Income earned by the debtor after the bankruptcy filing may not be reached by creditors to pay prior debts.
Is filing chapter 7 bankruptcy difficult?
For debtors fearing a long, protracted process, filing Chapter 7 bankruptcy is generally not difficult at all. The most critical issues facing a debtor contemplating a bankruptcy filing includes a careful analysis and disclosure of all assets and debts at the time of filing. Future income is generally not available to pay creditors and is controlled and owned by the debtor. A debtor should discuss the Chapter 7 process with an attorney and impact on the availability of future credit, owning assets like cars or a house, and what debts may not be discharged. A debtor is also required to complete a credit counseling course prior to filing, which will help the debtor understand options to manage their debts including loan modification or possible forgiveness. Once a debtor files Chapter 7 bankruptcy, there is no automatic right to withdraw the petition, so a debtor must fully understand the consequences of the Chapter 7 bankruptcy prior to filing.
Many individuals filing Chapter 7 bankruptcy believe that they may have to go to court and stand before a judge. Except for a creditors’ exam commonly referred to as the “341 Meeting”, most individuals will not have to see the inside of a courtroom to file Chapter 7 bankruptcy. The creditors exam is typically attended by the bankruptcy trustee and possibly a creditor or two that are owed substantial debts and believe that there are assets that may be utilized to pay creditors. This may include cases where the creditors believe the debtor has transferred property shortly before filing for bankruptcy to avoid repayment to creditors, and want information to bring a claim for a fraudulent conveyance. This meeting generally may last up to an hour and the trustee at a minimum will ensure that the bankruptcy petition and the information forms filed by the debtor are accurate and complete.
Who can file Chapter 7 bankruptcy?
Filing Chapter 7 bankruptcy is available to both individuals and businesses. Both types of debtors liquidate as a result of the bankruptcy, although individual debtors usually keep some or all of their assets because of the bankruptcy rules regarding exemptions and exempt property that cannot be used to satisfy unsecured creditor claims.
What is the “means test” in Chapter 7 bankruptcy?
For individuals filing Chapter 7 bankruptcy, there is a threshold income test that must be satisfied at the time of filing, otherwise the case is converted to a Chapter 13 bankruptcy or dismissed. The individual must include a form that states the filer’s monthly income and household size. If the monthly income is greater than the filer’s state median income, adjusted for household size, then there is a presumption that the filing is abusive and an additional test must be performed. This next step looks at the debtor’s monthly income total over 60 months less statutory expenses to see if it is less than either $12,850 or 25% of the total unsecured debt. If the means test is satisfied and no abuse is found, the debtor may proceed with filing Chapter 7. Otherwise, if the filing is presumed abusive, the debtor may justify the filing in light of the higher income above expenses, convert the case to a Chapter 13 bankruptcy, or have the case dismissed. A dismissal may have consequences for future filing, if any.
What debts are discharged and non-dischargeable in Chapter 7 bankruptcy?
A debtor filing Chapter 7 bankruptcy must analyze the types of debts to understand what debts are dischargeable and which debts are excepted from discharge. When the court is satisfied that a Chapter 7 petition meets all the requirements for discharge, the order is entered and all discharged debts are no longer enforceable by creditors. If a debt is not discharged or excepted from discharge, then creditors are allowed to pursue collection actions for those debts against the debtor after bankruptcy.
Some debts, like tax debts, may be effectively handled directly with the IRS but may not be discharged by a bankruptcy filing. For example, tax debts related to returns required to be filed within three years of the bankruptcy petition filing date are not dischargeable, whether the return is filed or not. If a tax that was due prior to this period, but assessed within 240 days of the filing, is claimed that tax debt will not be dischargeable. A property tax debt incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition, is not dischargeable.
Another issue that arises for taxes is unfiled or late filed returns. Taxes related to unfiled returns at the time of filing Chapter 7 bankruptcy are not dischargeable and taxes related to late filed returns that were filed within 2 years before filing Chapter 7 bankruptcy. While this sounds confusing, the important consideration is that debts related to unfiled tax returns will not be discharged and a debtor will need to handle these outside of bankruptcy, if possible. For late filed returns, if a tax debt is large enough relative to the other debts and the debtor’s financial needs, filing Chapter 7 bankruptcy might require a delay to allow the late filed return to be considered filed more than two years before the Chapter 7 filing date.
For property taxes and other taxes, it is important to consider if a lien notice has been filed that results in a secured interest in the property that would create a secured debt, not an unsecured debt that would be dischargeable. IRS debts may be handled outside of bankruptcy proceedings, and generally require an analysis of a tax attorney to determine the impact of the IRS tax lien on the property that a debtor may keep after resolving the tax debt and other creditor claims in bankruptcy.
Another category of non-dischargeable debt is any loan or credit obtained by fraud, false pretenses, or false statements. This could include a false credit card application or an auto loan.
Debt incurred immediately before the Chapter 7 bankruptcy filing may also be non-dischargeable. Consumer debts owed to a creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable. Cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable. This rule regarding cash advances prevents a debtor from substituting one creditor for another and limits a debtor’s ability to incur debt to pay an attorney.
Another potential pitfall for an individual filing Chapter 7 bankruptcy is failing to include a creditor on the creditors list in the bankruptcy petition. After a petition is filed, the court notifies creditors of the debtor’s bankruptcy and debts listed. If a creditor is not listed, and does not receive notice, and does not have actual notice of the filing, then that debt will not be discharged and a debtor will be subject to creditor collection after the bankruptcy filing. It is important, therefore, for a debtor to list all creditors and provide complete information on his or her finances to the attorney. There also may be penalties for knowingly failing to disclose required information in the bankruptcy filing.
Another big category for many bankruptcy filers is domestic support obligations. For filing Chapter 7, this includes child support obligations. These debts may not be discharged despite a debtor’s inability to pay. While domestic support obligations are non-dischargeable, it is important to know that these types of debts are first-priority unsecured debts, so these debts are paid first if there is property of the estate to satisfy the unsecured debts. If there is no property of the estate to pay any unsecured creditor claims, then all dischargeable debt is discharged, but non-dischargeable debt like domestic support obligations would survive the bankruptcy and continue to be collectible under state law.
There are many other categories of non-dischargeable debts including fines and penalties, wrongful death caused by an intoxicated operator, and securities laws violations among other non-dischargeable debts. Carefully analyzing all debts owed at the petition filing date will allow your attorney to understand what debts will continue after you file bankruptcy.
Will I lose all my assets by filing Chapter 7 bankruptcy?
No, a debtor filing Chapter 7 bankruptcy will generally be able to keep some or all of their property owned at the time of filing. The amount of property to be maintained depends on the type of property owned, the value of that property, and whether the property is subject to a perfected security interest at the time of filing, also known as secured property. Debtors who own a home or car may be able to keep the property depending on the equity in the property. If a home would be lost by filing Chapter 7 bankruptcy and the debtor wants to keep the property, filing Chapter 13 may be a better option. A debtor will be able to understand what property will be subject to forfeiture to the bankruptcy trustee to satisfy creditors and what property will not prior to filing the bankruptcy. A bankruptcy attorney can work with the debtor to analyze the debtor’s expected rights in property.
Does Chapter 7 bankruptcy stop creditors from garnishing wages?
Yes, the automatic stay stops creditor collection efforts. Further, in some cases, property or money that has been garnished just prior to the bankruptcy filing may be reclaimed by the debtor or debtor’s estate for purposes of paying priority debts, if required, or may be exempt property that is not available for distribution to creditors.
Can creditors collect on debts after bankruptcy?
Once a debtor is granted a Chapter 7 bankruptcy, all debts that have been discharged may not be collected by creditors. Creditors may attempt to collect the debt in violation of the court order, but debtors do not have to pay. A creditor may attempt to have a debtor reaffirm a debt which may create an obligation to repay, but debtors are not obligated to do this and generally should not. Creditors may also attempt to sell the debt to other debt collectors, who may claim that the debt is still owed, but this is not true.
For non-dischargeable debts, these debts may be subject to creditor collection actions including garnishment or property seizure, even from future property of the debtor. Debtors should take care to see that all dischargeable debts are paid and when possible pay non-dischargeable debts before paying dischargeable debts if the debtor knows that a bankruptcy filing may be inevitable.
Contact Michigan Bankruptcy Attorney Andrew Steiger for More Information
If you are considering filing bankruptcy, you need to fully understand how filing Chapter 7 bankruptcy works and compares to a Chapter 13 reorganization. Contact Detroit bankruptcy attorney Andrew Steiger at Steiger Tax Law for a free consultation to discuss your options and what debt relief you can expect by filing bankruptcy. Contact him at (248) 259-6367 or by email at Andrew.Steiger@SteigerTaxLaw.com.