What Is A Chapter 7 Bankruptcy?
A chapter 7 bankruptcy is consumer bankruptcy, it’s a form of relief for people who need to get out from under debts like medical debt, credit card debt, etc.
There are always exceptions, but for most people, if they’re going to file bankruptcy, they’re going to file either a Chapter 7 or a chapter 13, but sometimes of course they can file a chapter 11 or their family farmer can file a chapter 12.
How Many Chapters Are In Bankruptcy?
There are 6 actual chapters and one imaginary chapter:
- Chapters 7 and 9 for municipalities cities,
- Chapter 11 and 12 for family farmers and fishermen,
- Chapters 13 and 15,
- Chapter 20, that’s when people file a chapter 7 and then immediately turn around and file a chapter 13, and so a 7 plus a 13 makes a chapter 20.
Is Chapter 7 The Same Throughout The States?
Bankruptcy falls under federal law, so you would think that it’s the same all across the country.
The major difference from State to State has to do with exemptions, and exemptions are the parts of the law that protect people’s property.
There are homestead exemptions, there are motor vehicle exemptions, and each state gets the choice of whether they want to force everybody filing bankruptcy to use just the State exemptions, or if you have a choice of using the federal exemption slate or the State exemption slate.
To provide you an example, in Texas and several other States, you get to choose one or the other, you can either choose Texas or you can choose federal.
Texas has a very broad homestead exemption, and the federal homestead exemption is much lower, and sometimes it’s better for people to choose the State rather than federal.
However in other states like Ohio, you can only use the State exemptions, that’s the big difference from State to State.
Also, bankruptcies are filed in federal court, and federal courts have districts, so in the western district of Texas, the big differences have to do with just the administration, which forms are required or what is the timing or what is the procedure other than that it’s pretty much the same from state to state apart from that exemption issue.
Can Businesses Ask For Chapter 7?
It is an option, and it’s a very good option for people who don’t need to reorganize their business debt to stay in business, but if they’re shutting down.
We represented a client and she and her business partner had a brewery, this is not in Texas, they had a brewery that they were operating and then they had a falling out, and neither one of the partners could keep that brewery alive, so they needed to just dissolve the company and there were some significant debts against the business.
They filed a chapter 7 and got rid of the business debt.
Now, a business that is filing a chapter 7 usually are going to have a more likelihood of having a liquidation of assets, so in this case, the trustee who was assigned to the case came in and did an assessment of the different business assets the tables and chairs, the parts of the oven, all the parts of the kitchen, and then they sold them and distributed that money to their creditors.
That’s a long version of saying chapter 7 for a business is a really good idea when people want to get out from under any personal liability of their business debt.
Is There A Limit To The Income Level To File For Bankruptcy?
Only in chapter 7 does it make a qualification for your income level, if you’re alive and breathing and you have no income you can file bankruptcy.
There will be other considerations, for example, if you don’t have any income but you want to do a reorganization, then you might not have enough income to sustain a plan of reorganization, you can’t make your monthly payment so then there are some other options.
But in chapter 7 you do have to qualify for a chapter 7 by being under the median income for a family medium size in your State.
If you’re a single person in the State of Texas you would qualify for a chapter 7 if you make under $52,308, and then that number increases for a family of two, and a family of three, and a family of seven, and a family of 10.
As long as you’re under that number, and again, some exceptions have to come up sometimes, but in general, your income does affect whether you qualify for a chapter 7.
If you don’t qualify for chapter 7, there might be some other options that are available to you.
Should I Take All Of My Money Out Of The Bank Before I File For Bankruptcy?
That is one of those questions that somebody should 100% talk about with their bankruptcy attorney.
When you withdraw money from your bank account it doesn’t mean that the money has disappeared.
It’s not sitting in your bank account but it’s under your mattress or it’s in your wallet and you still have to report it as income so depending on other things going on in your case especially what kind of exemption slate, are you going to choose the federal or the State? because the cash exemptions are different for each of those, talk about that with your attorney.
It may not be an issue at all but it also might be an issue that you need to plan with the advice of your council you might need to do some advanced planning ahead of your bankruptcy.
Do I lose my retirement funds if I file for Chapter 7 Bankruptcy?
If your retirement funds are in a qualified account like a 401k or an IRA account, then the bankruptcy exemptions protect those 100% whether it’s State or federal, and that’s because Congress or your state legislature has a vested interest in people being able to retire one day.
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We don’t want to see people being homeless (it’s just in a very cold and frank way of putting it) it’s a burden on society, we don’t want to see people needing to use more State resources because they filed bankruptcy, that’s why we have exemptions so that you can keep your house, you can keep your car, you can keep going to school, you can keep going to work.
The same holds for your retirement funds, we want people to be able to retire after years of hard work, so if your funds are in a qualified retirement account or a pension, the State retirement system, then it’s completely exempt in the State of Texas and federally.
How To Be Eligible For Chapter 7
If you don’t have a social security number or a taxpayer identification number, you can’t file for bankruptcy.
While you don’t have to be a citizen you do need to have social security or a taxpayer ID number, you have to have that, you have to have filed all required tax returns.
There are some circumstances where you’re not required to file, but you do have to have filed everything that you were required to file, and you want to make sure you have that done before you file your bankruptcy.
That’s true for all bankruptcies, that’s not just chapter 7.
What Is A Trustee?
A debtor in bankruptcy is going to have more interaction with a trustee than with a judge, many debtors never come across a judge in their case.
A bankruptcy trustee in all cases is somebody who’s assigned to a case to administer the official term is to administer the estate the bankruptcy estate.
The trustee is part of the Department Of Justice Trustee Program, and their job is to make sure that all the rules are being followed. Have they reviewed the most recent tax returns? Have all the appropriate schedules been filed with the court? The trustee will also conduct the meeting of creditors, which is the one hearing that a chapter 7 debtor will need to attend.
If necessary, they look for assets that might be available to liquidate, and then they would sell and distribute the funds from those liquidated assets and distribute them to creditors, so they have quite a few different hats that they wear.
Can I Discharge My Tax Debt Through Chapter 7?
There are circumstances where you can discharge a debt.
The rules on that very broadly speaking, are that it needs to be in personal income tax, you cannot discharge 940 or 941 taxes, so those are employer taxes that your employer would pay.
You also need to have those tax returns filed and assessed 3 tax years ago, so we have not yet reached our 2021 due date for filing our taxes that will be April 15th as far as we know this year, and so anything that was filed and assessed by the IRS before 2017, is generally dischargeable so long as it hasn’t been attached as a lien against your property.
So 18, 19, and 20 are not dischargeable, but this is very broad, but income taxes that were filed and set and assessed before 2018 are generally dischargeable, and that’s a really fun message because people usually think: I know my tax debt isn’t dischargeable; but what about these other things.
At Lincoln-Goldfinch Law we have a case right now where $60,000 of old tax debt is about to be discharged.
Are There Debts That Chapter 7 Can’t Discharge?
There sure are, one hard and fast rule is support debt child, support spousal, support alimony is not dischargeable.
Recent income tax debt is not dischargeable, 949.41 taxes are not dischargeable.
In chapter 7 property settlements through your divorce are not dischargeable, that might look like my ex needs to reimburse me for medical expenses while we were separated, then if he files a chapter 7 bankruptcy he cannot discharge that reimbursement, that’s a property settlement.
The other thing that’s not dischargeable is kind of under the category if you don’t get free stuff, so you can’t stay in your house and discharge the mortgage, you can’t keep your car and discharge the car alone, so those secured debts you’re not going to be able to discharge in chapter 7.
Student loans are the hot topic right now in bankruptcy; in some very rare circumstances, they are dischargeable.
Every district is examining it right now and seeing if they want to loosen the reins on that, but broadly speaking they’re most often not dischargeable in bankruptcy.
What Are The Steps In Chapter 7?
The hardest work gets done on the front end, and that’s true for both the person filing bankruptcy and for your legal team.
Your attorney is going to ask you on the front end for tons of documents, there’s a lot of information that you need to disclose to your legal team.
One of those things is your recent tax returns, you need to show them proof of your income going back at least 7 months ago, sometimes more from all sources, even untaxed sources, even under the table work that you get, list of all your creditors, billing statements, titles to your cars, it’s all important information that you need to give your legal team.
Once we have all of that, then we start to prepare your petition.
Another thing you need to complete is an online course called a Consumer Credit Counseling Course, it takes about an hour, it’s done online, and then at the end of the hour you enter into the chat message with the person on the other end of the computer, and you get this certificate that says: Yep, I’ve completed that consumer credit counseling course, and with that, your attorney is going to prepare the petition, all the schedules, all of the amendments, all the attachments, and then they’re going to review it with you before filing.
A whole bankruptcy petition is somewhere between 50 and 60 pages unless there are a ton of creditors, it could be more.
You review that petition with your attorney, they file the case, and the minute the case is filed, the automatic stay goes into effect, at that point all collection activity needs to stop.
About a month after the filing you have this hearing, but these days because of Covid, the hearings are done over the phone, the hearing is called a 341 hearing, that’s the bankruptcy code that it comes from, it’s also called a meeting of creditors, but your creditors in chapter 7 will very rarely show up, more likely if it’s a business chapter 7, but for regular ones, their creditors don’t show up for that.
It’s your chance to swear under oath about the truth and the completeness of your petition, and it’s conducted by the trustee, not by the judge.
After that, there is another online class that you get the joy of taking, it’s financial management or a budgeting class, it takes another hour.
Two months after the hearing, you’ve done all the hard work, you’ve done the online courses, you’ve provided all the documents, now you just sit and wait, and you have about a 2-month waiting period.
After that 2 months have run, then your case gets closed and all the debts that can be discharged are discharged and then you’re done.
Can creditors call me when I file for bankruptcy?
No, and in fact, they’re not supposed to call you if you’re represented by an attorney, so in theory, this doesn’t always pan out the way it’s supposed to, but when you’ve hired your bankruptcy attorney, you can start answering the phone and say: Here’s my attorney’s phone number please don’t contact me again and they’re supposed to honor that.
The real sledgehammer shows up once you’ve filed your bankruptcy, so say you filed your chapter 7, and it takes a couple of weeks for the bat signal to work its way through the system, but after filing there’s the automatic stay, and the automatic stay is in place to give debtors some breathing room, they get a chance to say: Oh okay, now what are my next steps? I don’t want to be harassed by the phone.
They can even send you letters for your billing statement in the mail, they are so careful of that automatic stay, that sometimes when you get a mortgage statement it’ll say on the bottom (if you filed bankruptcy): We’re not asking you for payment, we’re just telling you what your balance is, so this isn’t violating the automatic stay.
Like we’ve mentioned, there’s a bat signal that goes out when you file bankruptcy, there’s a federal system pacer, so sometimes it takes a minute for that signal to get through all of the billing departments, and you can imagine how huge these corporations are, so give them a couple of weeks to let it slow down, but if after that you’re still getting bills, you’re still getting phone calls, tell your attorney, and they’ll go to bat for you and tell those people to knock it off.
What Are The Cons Of Bankruptcy?
The biggest impact is the credit impact, it is not great.
We did notice there’s always the anomaly, we did see one case where our client’s credit score went up as soon as he filed bankruptcy because his debt-to-income ratio had changed so significantly.
It’s not a good thing for your credit.
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Often people who are filing bankruptcy already have pretty low credit, so it’s just a matter of stopping the bleeding so you can rebuild sooner rather than later, and credit can be rebuilt after the bankruptcy.
Another impact is that if you wish to purchase a home, lenders like to see you out of bankruptcy for 2 years before they will lend you money, again always exceptions, but that’s the general rule, they want to see you out of bankruptcy for the full 2 years after you’re ready to buy your home for example.
How Can I Pay For Bankruptcy If I Don’t Have Funds?
You have to pay a lawyer, not a small amount, and you’re already struggling to make ends meet, we will tell you what we’ve seen.
Our clients do one thing that helps often is if you are pretty sure that you’re about to file bankruptcy, your attorney may advise you to stop paying the debts that are going to be discharged.
We often tell our clients if we’re going to be filing their case within three months, stop paying that credit card debt, or your medical debt, which is usually more often what it is.
If you’ve stopped paying that, then often those monies that you’ve been sending to capital one, can go to pay your bankruptcy attorney.
Another option especially now we’re about to hit tax season, if you’re expecting a refund this tax season, you can pay for your bankruptcy with your refund, and that’s why coming up, it’s our busiest season for bankruptcy filings because people will use their refunds to file for the bankruptcy, for their long-term financial health as a last resort.
Sometimes people will have family members or friends that are willing to pay for, and we have had people who just pay a little tiny bit every month, we had one fellow years ago, who paid about a hundred dollars a month, and eventually, he got everything done, he was disciplined about it, and then eventually we filed his case.
At Lincoln-Goldfinch Law, we’re always willing to work with people on what they’re able to do.
Very few people have the funds upfront to pay for the bankruptcy, most people need to have some kind of payment plan before we get them filed.
One caution is never to use your credit card to pay for your bankruptcy because that could come back and bite your bankruptcy preparer, and you won’t be able to have that amount discharged in your bankruptcy.
Bankruptcy attorneys will not accept credit cards for payment unless it’s a friend or family member’s credit card.
In case you have additional questions about chapter 7, your debt, or about your specific case, you can contact us at (855) 502-0555. After a short 10 minute evaluation of your case over the phone we will let you know what options you have. You can also follow us on our social networks so as not to miss our weekly transmissions via Facebook, YouTube & Twitch.
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