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Frequently Asked Questions

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What is a Chapter 7 bankruptcy?

The purpose of filing a chapter 7 is to seek relief from debt by discharging certain financial obligations.  Chapter 7 is the part of the Bankruptcy Code that deals with “liquidation”. When one starts a bankruptcy (by filing a bankruptcy petition), the petitioner has an obligation to list all of his/her assets and liabilities.  To protect one’s assets from seizure by the bankruptcy trustee, the petitioner seeks protection from statutory laws called “exemptions”. Each state has its own unique exemptions.  Thereafter, all “non-exempt” assets (an asset that is not protected with an exemption), if any exists, are turned over to the trustee, and the trustee liquidates (or sells) the asset.  The net proceeds of the sales are then divided between the various creditors. While this liquidation of assets in a chapter 7 proceeding rarely happens, it is of paramount importance to make certain that one’s assets are fully protected with the correct exemptions.

Who can file a Chapter 7?

The general rule is any person who resides in, does business in, or has property in the United States of American can file for chapter 7 bankruptcy protection if the person qualifies under the Means Test (see below).  However, a person who has been granted a chapter 7 discharge within the last eight years is not eligible.  Furthermore, any person who has intentionally dismissed a prior bankruptcy within 180 days is also not eligible.

What is the Means Test?

The Means Test was adopted by Congress in 2005.  The purpose of the legislation was to make the implementation of bankruptcy rules uniform across the country.  Also, the law was designed to avoid any abuses in bankruptcy by not allowing individuals to file if that person has too much disposable income.  To accomplish these tasks, the court compares one’s monthly gross income (averaged over the last full 6 months) to the median income of people living in the petitioner’s locality who have the same family size. If one’s income exceeds the median income, and the person has sufficient disposable income to pay unsecured creditors, then chapter 7 bankruptcy is not allowed.

What debts cannot be discharged?

Not all debts are created equal in the eyes of the bankruptcy court.  The following debts are generally considered to be non-dischargeable: taxes owed to governmental agency within 3 years of filing; child and spousal support; criminal fines and penalties; student loans unless repayment creates an unusual hardship; liability for injuries arising out of intoxication; and debts from fraudulent or willful and malicious conduct.
In addition, secured debts are treated differently than unsecured debt.  While secured debts (i.e. mortgages) can be discharged, the creditor would then have the option of initiating proceedings to recoup the secured property in a chapter 7.  However, if the debtor is up-to-date with the secured debt payments (or has equity that is protected by exemptions), then the debtor usually has the option of retaining the property and assuming the on-going indebtedness.

What’s this about a credit counseling course?

A bankruptcy petitioner must attend a credit counseling course prior to, and within 180 days of, the filing the bankruptcy petition.  The course can be conducted on the internet or through the telephone.  Generally, the cost of the course runs from $25-$40.  Also, a second course is required to be taken within 45 days of the 341 hearing (see below).

Do I have to go to court?

Everyone that has filed for bankruptcy must attend a meeting of creditors before being discharged.  This meeting is commonly called the “341 meeting”.  The meeting usually takes place about 45 days after the petition is filed.  In the typical case, creditors do not show up at this hearing.  Usually, the only people at the hearing are your attorney, the bankruptcy trustee and other debtors.  In the typical case, the trustee will only ask a few questions to make certain that your bankruptcy petition accurately reflects all of your assets and all of your liabilities.

Will bankruptcy stop collection actions and bill collectors calling?

One of the major benefits of filing a bankruptcy petition is the stopping of all collection proceedings.  As soon as a petition is filed, an automatic “stay of proceeding” order is entered by the court.  This “stay of proceeding” is sent to all creditors.  If the creditor continues to make bill collection calls, or if the creditor continues with an independent collection lawsuit after the “stay of proceeding” is entered, then that creditor can be subjected to sanctions, costs and attorney fees.

What is the difference between a chapter 7 bankruptcy and a chapter 13?

There are numerous differences between a chapter 7 and a chapter 13.  First, in a chapter 7 proceeding, there is no repayment of debt plan.  Certain debts in a chapter 7 are merely eliminated (or discharged).  In a chapter 13, a plan is submitted to the court where a portion of the debt is repaid to the creditors over a period of time for either 36 months or 60 months (depending on your disposable income).

The second major distinction concerns how your assets are treated.  In a chapter 7 proceeding, you are able to keep all assets that are protected with the applicable state or federal exemption.  Depending on the state, these exemptions generally cover your home, automobile, pension or 401 K, and most household furniture and furnishings. While typically this does not happen, the trustee does have the authority in a chapter 7 to liquidate all non-exempt assets.

In a chapter 13, all assets are protected.  Chapter 13 is a reorganization of debt and not a liquidation.  In fact, chapter 13 can actually help save any of your assets that are facing foreclosure.  If one is behind in installment payments for a secured debt (i.e. home or automobile), chapter 13 options must be considered if you want to keep that asset.  The amount of the arrearages for that debt can be placed into a chapter 13 plan.  If the repayment plan is confirmed by the court, then any foreclosure proceeding would be stopped as long as you timely make the plan payments and the obligations on the original indebtedness.

Finally, chapter 13 is a very powerful financial tool.  A chapter 13 plan can not only help one retain existing assets, it can also strip certain liens. In certain occasions, a well drafted chapter 13 plan can remove the security interest for second mortgages, and treat second mortgages as unsecured debt.  At the end of the chapter 13 plan period, all unsecured debt that has not been repaid are discharged.

How long will bankruptcy stay on my credit report?

The fact that you filed a bankruptcy will stay on your credit report for a 10 year period.  However, this does not mean that you cannot get credit for this entire period.  In fact, it has been reported that some creditors reduce your credit risk evaluation after you file bankruptcy since they know that another bankruptcy cannot be filed for a period of 8 years.  Also, by discharging your debt in bankruptcy, your debt-to-income ratio will be substantially improved.  For this reason, while interest rates may be somewhat elevated, it is not unusual for a person to qualify for the purchase of an automobile shortly after being discharged.  Further, it has been stated that some are approved for the purchase of a new home within several years after being discharged if the party otherwise qualifies for the new indebtedness.

Can I be fired if I file bankruptcy?

Bankruptcy laws absolutely prohibit any discriminatory treatment by employers based upon a person filing for bankruptcy protection.