Chapter 7 Bankruptcy
Basics of Filing a Chapter 7 Petition for Bankruptcy
Individuals seeking bankruptcy protection have three options – they can file petitions under Chapter 7, Chapter 11 or Chapter 13 of the code. This note is focused on Chapter 7 petitions. The key difference between Chapter 7 and Chapter 13 is the repayment of debt. Chapter 7 is known as a liquidation proceeding, meaning your assets are liquidated, subject to certain exemptions, to pay lenders. Chapter 13 allows consumers with a regular income to establish a payment plan to pay back all or some of their debts to creditors over a period of time. Chapter 11 is for sophisticated financial circumstances.
Chapter 7 liquidations, contemplate an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. In “no-asset cases” all of the debtor’s property is exempt and nothing is actually liquidated. Creditors with unsecured claims receive a distribution only if the case is an asset case and the creditor files a proof of claim with the court. Upon completion of the Chapter 7 case, individual debtors receive a discharge that releases them from personal liability for dischargeable debts. Debtors normally receive a discharge within a few months after the petition is filed.
Amendments to the Bankruptcy Code enacted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine if the debtor qualifies for relief under chapter 7. If the debtor’s income exceeds certain thresholds, the debtor may not be eligible for chapter 7 relief. To qualify for a Chapter 7 bankruptcy a consumer must complete a mandatory credit counseling course within 180 days before filing bankruptcy, meet the Means Test, and then file a petition and related schedules with the bankruptcy court. Upon filing, an order for relief is entered and the automatic stay is put in place. The automatic stay limits the actions of creditors and stops pending civil lawsuits. The court will appoint a Trustee to oversee the case.
Secured Debt. In Chapter 7, a consumer’s home may be saved only if payments are kept current. If payments are not kept current, the lender may apply for relief from the automatic stay and proceed to sue the homeowner in a foreclosure action. While a debtor may be able to discharge the financial obligation or any corresponding shortfall from the sale of the house, the debtor is not able to stop the foreclosure of the property without staying current with the mortgage obligation. The mortgage is a possessory interest that survives the chapter 7 case. Similarly, loans secured by a motor vehicle must also be kept current. Typically, motor vehicles depreciate faster than homes, so debtors must consider their options before continuing to pay car loan debt or reaffirming such debt. Debtor’s options include: Staying current with payment obligations; Redeeming the vehicle for its value (usually NADA wholesale or its equivalent); surrendering the vehicle; or reaffirming the debt. If reaffirmed and approved by the Court, the consumer is bound by the original contract and may be sued for a deficiency if he or she later defaults.
I understand that no one enjoys filing bankruptcy. But if your financial circumstances are such that you can no longer meet your monthly obligations, then it may well be time to at least review your bankruptcy options. Chapter 7 relief is appropriate for individuals or businesses with unsecured debt they can no longer repay. An attorney should analyze your income, assets, and debts to determine if a chapter 7 case is appropriate to your individual circumstances. Help is just a phone call away.