Chapter 7

 

 

Federal law allows a debtor who cannot afford the monthly payments on her debts to seek relief in bankruptcy court. She has the choice of repaying a percentage of her debts under a Chapter 13 bankruptcy's monthly payment plan; or of wholly eliminating most of the debts under a Chapter 7 bankruptcy.

For some borrowers, such as those with a small income, Chap. 7 is the best option. And filing for Chap. 7 should not be thought of as a failure, but as an opportunity to solve financial problems so that one can move on with one’s life.

What is Chapter 7 Bankruptcy?

Chapter 7 allows a person to eliminate many of her debts and to stop wage garnishment. It gets rid of most unsecured debts such as medical bills and credit-card obligations, and it eliminates some secured debt. The objection that Chap. 7 harms a person’s credit score, is usually outweighed by the fact that a debtor who needs bankruptcy protection already has poor credit.

But Chap. 7 is not always the best option. Some people’s incomes are too high for them to qualify for it. And Chap. 13 bankruptcy as long as the debtor completes her repayment plan, will harm her credit standing less than Chap. 7 will. That is because a Chap. 13 debtor pays back some of her unsecured debt, while a Chap. 7 debtor repays none of it.

How Chapter 7 Works:

The first requirement for Chap. 7 bankruptcy is that the debtor take a one-hour credit-counseling course online. She may take it on her own or a friend’s computer, or at her attorney’s office. (When a bankruptcy nears completion, usually in three or four months, the debtor must take another online course, on financial management.)

Next the borrower must file a bankruptcy petition with the bankruptcy court that has jurisdiction over the municipality where she lives. The petition is filed with the court along with other documents, and the debtor pays a $335 filing fee. A hearing date is set.

The petitioner must also submit to a two-step evaluation of her income and expenses, so that the court can determine whether she is eligible for Chap. 7 bankruptcy. The process is complicated, and a major mistake can lead to the petition’s being rejected.

After the debtor files her Chap. 7 petition, if bill collectors have been calling she should tell them that she has filed for bankruptcy, because by law, they must then stop contacting her. Similarly, the debtor can prevent collection letters from coming by telling her creditors that she has declared bankruptcy.

If a borrower’s petition for Chap. 7 relief is successful, her eligible debts will be discharged (that is, eliminated). Eligible debts include credit-card debt; most bank loans, personal loans, and credit lines; and medical bills. But student loans, alimony, child support, and taxes owed are not dischargeable.

Preparing to File:

To enable the debtor’s attorney to complete the bankruptcy petition, the debtor must provide information about her income, living expenses, assets, and debts. The debtor need not remember all the material, because most of it will be contained in documents: her credit report will name her creditors except those who are friends or family; paystubs and income-tax returns will document her income; and monthly bills will tell her expenses.

Creating a list of current assets will require the debtor to remember her personal possessions, including art, antiques, and jewelry. But financial assets such as stocks, bonds, and bank accounts, and the real estate that she owns, will be described in documents.

The bankruptcy attorney will determine whether any of the debtor’s assets is exempt from being seized by the bankruptcy trustee and sold to pay creditors. (See this website’s submenu choice, “Bankruptcy Exemptions,” for more information.) The following categories of personal property are usually exempt:

  • equity up to a certain amount, in the debtor’s primary residence;
  • equity up to a certain amount, in her car or other motor vehicle;
  • most clothing;
  • most household furnishings and appliances;
  • alimony and child-support payments;
  • most public benefits payments, such as Social Security;
  • cash up to a certain amount, that is held in a checking account or savings account; and
  • many pension and retirement accounts.
  • How much of an asset’s value is exempt depends on the type of asset it is, and on the debtor’s circumstances. And the debtor can keep any item that is needed to earn a living, such as a laptop computer or car, even if its value exceeds the exemption limit.

    But luxury goods, and recreational vehicles like an ATV or a camper, are not exempt.


    What Happens in Chap. 7 Bankruptcy:

    Not all debts can be discharged in Chap. 7 bankruptcy. Student loans remain, though a debtor may not have to make the payments on them while she is in bankruptcy. (See this website’s menu choice, “Student Loans,” for ways of lowering or eliminating student-loan debt.)

    Creditors have the right to contest a bankruptcy filing, but it happens rarely. Usually no creditor’s representative appears in court, because the debt owed each creditor is small. In a rare case, however, such as when the debtor ran up a huge credit-card bill or bought an expensive car just before filing for Chap. 7, a creditor may oppose the debt’s being discharged.

    This website’s page, “After Bankruptcy,” describes the challenges that lie ahead for someone emerging from bankruptcy. It suffices to say here that one who has completed a Chap. 7 bankruptcy has the opportunity to make wiser financial choices than she made earlier in life.

    Attorney Stephen A. Katz is available to represent borrowers who file for Chapter 7 bankruptcy. Attorney Katz will provide a free consultation that is confidential, to a person who is considering Chap. 7.

    QUICK CONTACT • Attorney Stephen A. Katz

    Toll Free: 1-(800) 251-3529

    E-mail: SAKatz00@gmail.com