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Bankruptcy – Chapter 7
If you are considering bankruptcy, your first decision is whether to file a Chapter 7 or a Chapter 13 bankruptcy. At our office we represent clients in Chapter 7 and Chapter 13 Bankruptcy filings.
When is Chapter 7 appropriate?
Chapter 7 is appropriate for those who cannot afford to pay on their debts. While chapter 13 works well for those who can afford some kind of payment plan, chapter 7 is reserved for those who have no means to pay on their debts. In order to evaluate whether chapter 7 is the correct course of action, the attorney will need to review the person’s budget of income and expenses. If a budget analysis shows no ability to pay, after living needs are considered, then chapter 7 may be the best and only option to discharge debts. Chapter 7 may not be appropriate if there is property at risk, such as a home that is going into foreclosure or a vehicle that may be repossessed if the debtor cannot catch up in time.
Chapter 13 is usually the only way to reorganize debts in order to catch up on missed payments for car and home loans. Also under chapter 7 a person is only allowed to keep a certain amount of assets free of the bankruptcy. “Exempt” assets may be retained but if assets exceed what the law allows a person to keep, these assets may be at risk in a chapter 7 case. Chapter 13 may be more appropriate for these individuals. Most cases involve little if any risk of losing assets because a qualified attorney should review what assets and property a person has before advising on what chapter to file. Our policy is to review the case thoroughly before a decision is made to file chapter 7 or chapter 13. See our forms and downloads for preparing to meet with us.
What debts are cancelled in chapter 7?
Most debts are discharged or cancelled in a chapter 7 case. There are exceptions to the broad discharge of debts. Debts for most taxes and student loans are not cancelled. Debts or obligations under a divorce or support decree are not usually cancelled, and debts due to fraud, dishonesty or misconduct are not cancelled. Bankruptcy relief from debt can be denied to those who attempt to abuse the law to their advantage or are guilty of some kind of misconduct such as destroying, concealing or disposing of their assets or financial records. Criminal charges or sentences are not affected by filing bankruptcy. Unless a debt is excepted from discharge, it will be cancelled or discharged at the conclusion of the case. Most bankruptcy cases are routine as long as they are properly prepared and the client is honest in disclosing all financial information on the schedules. The attorney should guide the client through the process so that the case is presented correctly.
What property is at risk in a chapter 7?
Property usually is not at risk when a qualified attorney advises you to file chapter 7 bankruptcy, but sometimes property can be taken by the bankruptcy official (trustee) and sold to pay on your debts. A person filing bankruptcy is called a debtor. When a debtor files chapter 7, all of the property owned must be disclosed or declared. A debtor is allowed to keep a generous amount of assets under chapter 7 as long as full disclosure is made. Most property in a typical chapter 7 is “exempt” from creditors in the bankruptcy. Exemptions are assets and property that a debtor may keep from the case, but if assets exceed the exemptions, they are at risk and may be taken and sold to pay creditors. Only a qualified attorney can give up to date advice on what is exempt and what is not exempt. Preparing in advance for your interview includes filling out forms and listing the value of your assets. The biggest question will usually be “what is your property worth?” Whether your property is exempt may depend on its fair market value.
If property has a mortgage, then the value of the asset to the owner is the equity. How much equity in a property will determine whether the property is at risk in chapter 7 bankruptcy. If property is at risk and is needed by the debtor, sometimes it is better to choose chapter 13 since there is little risk of losing assets as long as payments are made under the chapter 13 payment plan. Chapter 13 is also the only way to save a home from foreclosure or a car from being repossessed if the debtor is behind and cannot catch up in time to satisfy the creditor. Chapter 7 does not “reorganize” debts like a chapter 13 plan so under a chapter 7 one needs to stay current on mortgages and car loans in order to retain them, while under chapter 13, a debtor can stretch out the catch up process.
How do I keep paying on my home and car or truck?
If you want to keep your home or vehicle, and have payments due on these items, it is normal to continue paying on these debts after the bankruptcy is filed. However, before the case is “discharged” or closed, you need to sign and file with the court an agreement to reaffirm or reassume these debts. This agreement is called a “reaffirmation.” If no reaffirmation agreement is filed requiring the debtor to keep paying, the debt is cancelled and the creditor may not accept payments on the account and may want to repossess or foreclose on the property. The attorney will work with the debtor and creditor to negotiate and sign the reaffirmation agreement, and there is normally a modest fee for doing so. This is done after the case is filed and must be completed and signed prior to discharge. Some people do not wish to retain their home or car, so they agree to surrender the property and discontinue paying. These debtors who do not wish to keep paying on these debts do not, of course, sign a reaffirmation.
What does it mean to “discharge” debt?
A discharge of debt means that the debt is legally cancelled. Getting a discharge is the reason to file for bankruptcy. Most kinds of debts are discharged in a normal bankruptcy situation so we usually explain the concept by saying that most debts are cancelled but some are not and we go over what kinds of debts are not discharged. The debts which typically are not cancelled are special kinds of debts, such as child support, alimony, student loans, most income taxes, most student loans and debts relating to fraud, misconduct, intentional injury or crimes. Grounds for denying discharge also include hiding or concealing assets, filing false documents or the loss or destruction of financial records. The typical case does not involve these types of things, but the categories of debts which remain after bankruptcy should be reviewed with a qualified attorney. Also, running up credit just prior to filing bankruptcy is evidence of fraud as is transferring property to friends or relatives hoping to keep them out of the bankruptcy, and this type of behavior should avoided, as should any type of dishonesty or wrongful conduct.
A Chapter 7 bankruptcy is ideal for individuals with enormous unsecured consumer debt, such as credit cards. In a typical Chapter 7 bankruptcy filing, the debtor is allowed to keep important assets such as the home, vehicles, and household contents. However, if the wrong choice is made or the case is not prepared correctly, disastrous consequences may occur. In most instances, the debtor is allowed to keep all of their property. Upon completion of the Chapter 7 bankruptcy filing, most debts are extinguished.
Some people attempt Chapter 7 bankruptcy alone, or with a legal document service. To be sure you are getting the maximum benefit available under the law; you should work with an experienced bankruptcy lawyer.
To learn more about bankruptcy and debt relief, see our Debt Relief section.
Contact our experienced bankruptcy attorneys to discuss your Chapter 7 bankruptcy questions. We offer a free budget analysis and will provide you with a free credit report. Evening and weekend hours are available by appointment.
We are a Debt Relief Agency helping people file for bankruptcy relief under the Bankruptcy Code.