What Is Chapter 7 Bankruptcy and When Should I File?
Many people facing financial difficulty often hear about how bankruptcy provides a fresh start. When thinking about credit scores, many people become concerned that bankruptcy may prevent them from ever owning a home or getting another credit card. This post helps people understand what Chapter 7 bankruptcy is, how Chapter 7 can help you, and whether there are alternatives to bankruptcy that may help.
What is Chapter 7?
Chapter 7 is a type of bankruptcy filing that helps debtors eliminate debt and achieve a fresh start. It is commonly referred to as a liquidation, but this may not actually be accurate In many cases. The US bankruptcy code provides for an organized way to discharge certain debts but not others. A person filing bankruptcy may have to give up some of their assets in exchange for this fresh start. Creditors cannot pursue discharged debts after the bankruptcy case is confirmed and closed.
Not everyone can qualify for a Chapter 7 bankruptcy. There is a means test, which prohibits this type of bankruptcy for certain high earning individuals. The means test contains an income threshold that if exceeded, additional work is required to prove to the court that the bankruptcy g filing is not an abuse of the system to avoid repaying creditors. In other words, these people should be able to pay their creditors more and so should file Chapter 13 if the qualify for that chapter of the bankruptcy code.
How Does It Work?
Chapter 7 begins with the debtor filing a petition for relief with the local bankruptcy court. This causes the automatic stay to go into effect and all creditor actions and collection efforts must stop immediately.
The debtor must also take a credit counseling course, which is fairly straightforward and does not need to be completed in person. The filer includes a list of all assets and debts, the names of creditors, ownership information related to the assets, any secured debts, mortgages, etc. so the court can sort through and determine if a discharge is warranted.
A bankruptcy trustee is also assigned to review the filing and determine if the filing is accurate. The trustee works on behalf of creditors to collect any non-exempt assets to use to pay creditors. The trustee will organize a meeting of creditors to ask the debtor questions about debts and assets, as well as questions related to qualification for a Chapter 7 filing. Creditors are usually interested in determining if there are any unlisted assets or transfers of assets that could be used to pay creditors.
If the filing is complete and there are no concerns from creditors, the court will determine what debts are discharged and approve the bankruptcy filing. A debtor must also take another post-filing education course to obtain a discharge.
How Is It Different From Chapter 13 Bankruptcy?
Unlike Chapter 7, Chapter 13 is a repayment plan that requires a debtor to repay certain creditors either partial or full repayment. A repayment plan is typically 36 to 60 months. A debtor must complete the plan for the full repayment term to receive a discharge of debts listed on the bankruptcy petition.
Failure to complete the plan results in creditors having the right to pursue any remaining debts. Debtors who do not complete the plan may still benefit from having creditors receive payments according to the plan, keeping a home or car, and even avoiding garnishments and loss of assets that normally occurs without bankruptcy protection.
What Debts Are Eliminated or Discharged?
Many common types of debt are eliminated in bankruptcy. Credit card debt, medical bills, utility bills, other unsecured loans, secured debts, gambling debts, and personal loans. Secured loans like home mortgages or auto loans can be discharged with the mortgage company taking ownership of the home or car. The debtor would not be personally liable for any remaining balance on the loan after bankruptcy if a discharge is granted.
Tax debts may be discharged if returns have been filed and the tax debts are older. Tax debts could include income taxes or property taxes.
For typical consumer debts, the debtor will receive a discharge unless certain bad acts like fraud prevent the court from granting a discharge of the debts. Creditors may attempt to convince debtors that it is better not to file bankruptcy so that they can continue garnishing wages or other income. Debtors may be able to get a portion of the garnishment back, but not garnishments from prior years.
Student loans are generally not discharged, but it is possible in cases of extreme hardship to discharge a portion or all of the debt.
What Debts Cannot Be Discharged
The biggest non-dischargeable debt is child support. Child support will not be discharged in a bankruptcy. Other types of non-dischargeable debts include certain tax debts, most student loans, payments using a credit card that are for non-dischargeable debts, government fines, debts not listed on the bankruptcy petition, debts resulting from fraud while acting as a fiduciary, domestic support obligations, tort debts related to malicious injury to others or their property, and other payments related to divorce or separation agreements.
The list includes many debts that people do not have, so this generally should not be a concern. The big debts include taxes, domestic support obligations and student loans. For individuals faced with IRS or state income tax debts, there are programs available under the IRS Fresh Start Initiative or similar state programs that allow either payment plans or an offer in compromise. These tax programs help taxpayers manage repayments. If a debtor cannot pay the IRS and other creditors simultaneously, bankruptcy may be the best option to make payments.
Can I Keep My Assets If I File Chapter 7?
For many people who have dischargeable debts, the big question is what assets can I keep and what assets will I lose? The federal bankruptcy laws provide exemptions that allow a debtor who qualifies for Chapter 7 to keep certain assets based on type and value. Anything not covered by an exemption would be turned over to the bankruptcy trustee, who the uses the asset to satisfy creditor claims.
Michigan bankruptcy laws provide for exemptions as an alternative to the federal exemptions, and the federal code allows this. A person can choose which exemptions to use, but cannot mix and match them. Based on each individual filer, the federal or state exemptions may be more favorable. Michigan does contain generous exemptions. Other state have opted not to permit state law exemptions.
How Do I Know If I Qualify For Chapter 7?
For individuals seeking relief under Chapter 7, there is no maximum or minimum amount of debt required to file. There is a potential income limit that may prevent an individual from filing Chapter 7 bankruptcy. The income limitation is reviewed under the "means test" in the bankruptcy laws. The petitioner should review their income and household size compared to the median income for the state where you reside. For household size, the more children you have, the higher the income limit for the means test.
Income is calculated on a monthly basis. The 6 months before filing bankruptcy are reviewed under the means test. If a filer expects income to fluctuate, this may impact whether the means test is satisfied or failed. The average of the 6 months is used for purposes of the means test, so having a big month could also impact the calculation.
The means test also compares that income number to expenses if the filer's income is greater than the median household income. After reviewing the filer's expenses, if there is any income left the filer would not be eligible to file under Chapter 7 bankruptcy. This is a fairly complex calculation and requires a lot of information from the filer. If the filer's household income is high enough, you can expect the bankruptcy trustee to carefully review the filer's expenses if the filer claims to pass the means test after factoring in expenses.
How to Know If I Should I File Right Now
The decision to file usually comes down to whether or not creditors will garnish or seize your income or other assets that will result in the loss of a job, home or car. When creditors garnish wages without allowing for a manageable payment plan, debtors may have no choice but to file bankruptcy. If you do not reasonably expect to repay creditors within a few years or you believe your financial problems may be at their worst, filing now makes sense.
Is It Smart to Wait to File?
If you expect to increase your debt load in the near future but believe you may not ever be able to pay off your debts, you may need to consider the right time to file. Another factor is whether you expect your income to increase or decrease, and whether you may or may not pass the means test. If it is a close call, then you may have to act quickly to ensure you can achieve your financial goals with bankruptcy.
How Do I File With an Attorney?
You are not required to file with an attorney, but it is generally a good idea. Very few people file without an attorney. An attorney will help you review key aspects of filing, including the means test, documentation issues, creditor exam prep, and the bankruptcy filing itself. While some attorneys may charge thousands of dollars, Detroit bankruptcy lawyer Andrew Steiger charges reasonable fees starting at $469 for the attorney fee, and guarantees the fee and work related to the fee. If you have a bankruptcy case that will likely require litigation, an hourly fee is appropriate in order to complete the work.
How Long Does Bankruptcy Take?
Completing Chapter 7 can take about 4 months to receive a discharge, assuming everything goes well. The automatic stay stops creditors from collecting any debts as of the date of filing and lasts as long as the bankruptcy case is active. Certain creditors may receive relief from the automatic stay in some cases, including landlords looking to reclaim a property. When a creditor obtains relief from the automatic stay, this does not necessarily mean they can collect a debt that is listed in the bankruptcy petition.
Another timing issue in a Chapter 7 case is the creditors examination or "341 exam". This usually occurs about 1 month after filing and after creditors have received notice of the case.
A debtor must also take two courses outside of bankruptcy including credit counseling and financial management. These must be completed prior to receiving a discharge.
How Much Does Bankruptcy Cost?
Chapter 7 currently costs $338 to file the bankruptcy. That amount is paid to the court. The fee may be paid with the filing or the petitioner may request to pay the fee in installments after starting the bankruptcy case.
The two credit related courses are independent of the filing cost. Courses offered by non-profit organizations may be between $20 and $50. Once completed, the certification would be filed with the bankruptcy court.
Attorney fees are usually the biggest cost of a bankruptcy filing. Attorney fees can range from about $469 to $2,500. Some attorneys will charge the same flat fee regardless of the amount of work required.
Detroit Bankruptcy Lawyer Andrew Steiger Can Help You File Chapter 7
At Steiger Tax Law, Detroit bankruptcy lawyer Andrew Steiger will review your case and options with you to see if Chapter 7 makes sense. Attorney Andrew Steiger's fees are reasonable and are charged based on the work required to complete the process. From start to finish, your fee is guaranteed. If you are facing financial hardship, do not let the fear of high attorney fees deter you from filing for bankruptcy. Get a fresh start with a Chapter 7 bankruptcy.