When one is contemplating filing bankruptcy, the chapter 7 bankruptcy laws are most sought after. This is so as you are legally clearing your debt with no obligation to pay it back. Additionally in the chapter 7 bankruptcy you are not held responsible for any deficiencies (such as on a mortgage or other pieces of property).
In a foreclosure where chapter 7 bankruptcy laws have not precluded the foreclosure, you can be held responsible for the amount left over from a sale that does not cover the original loan amount. That is the deficiency.
So it goes without saying that this may be the first choice for many, yet there are rules and requirements to be met. There are also many personal situations that may make this choice not to your advantage even though you qualify.
So lets take a look at the Chapter 7 Bankruptcy Laws.
First considerations in the chapter 7 bankruptcy laws
First thing to consider when looking in to the chapter 7 bankruptcy is what the laws actually say and what happens in this form of bankruptcy.
You may at the point of filing for bankruptcy be drained of cash and not able to make your payments. In this case qualifying for this form of bankruptcy may be easy but a big consideration is whether you have property of any value.
Chapter 7 bankruptcy laws appoint a trustee to take over your property. If you DO have property of value it will be sold and turned into money (liquidated) to pay your creditors.
Depending on your state laws and federal law that is applicable, there may be property that is exempt from being used to pay your creditors.
Examples of Exemptions (I live in Mass. and am using the exemptions from that state)
If you have homesteaded your property and it is your main residence that you are currently residing in and lawfully able to continue residing in ( I am wording it this way as situations such as divorce decrees can get in the way here) a homestead if applied before a bankruptcy filing will exempt your house up to certain values (the equity).
Personal property: The bankruptcy courts are not interested in your furniture, clothing, appliances ect. unless there is reason to believe you have property of this nature out of the ordinary. When you file, 2 years of income tax returns are filed along with the list of credit cards and loans that you are attempting to discharge. This all tells a story of your habits and lifestyle.
So unless you have very excessive debt, long list of vehicles, luxury items or extensive jewelry, ect. to include as your personal property, no one will be coming to your house to take inventory.
The official exemptions for MA. in chapter 7 bankruptcy laws say $3000.00 allowed for furniture.
Bank account can have 125.00 but then goes on to say another $300.00 for food.
More amounts for fuel to heat, books, credit union deposits to $500.00
IRA's, retirement plans, pensions, life insurance most are not touched.
Cars federal exemption is $3225.00
I can tell you if you have a car that you are still paying a loan on, you want the car, are current with the payments and are positive that you will be able to stay current, in most cases it will be no problem.
Public Benefits such as disability payments, AFDC, unemployment ect are not involved.
Tools of a trade are also exempt with a $500.00 cap.
This is only a list of examples and may be different in the state you reside in. The point of this being, if you read the bankruptcy credit repair page, it explains that bankruptcy was put in place to give the honest debtor a fresh start from burdensome debts.
The burden will not be lifted if the bankruptcy court liquidates all your assets and leaves you without the basic necessities of life. So there is a fairly lengthy list of items that are considered or exempted.
Additionally there is a federal exemption list and several states will allow you to pick from either the federal or their state list. The federal list dollar amounts can be doubled by couples filing together.
Requirements of the Chapter 7 Bankruptcy Laws
Two of these requirements are no big deal they are actually very informative and helpful,
The credit counseling course. This must be done within 6 months before the filing of the bankruptcy.
Your filing date is the day the bankruptcy court gets all the required documents to go forward with your case. It is not the day you walk in to your attorney's office or day you gather up documents yourself to attempt to file a bankruptcy.
Preparing for the filing date can take several weeks.
The debt education course. This is taken after you file but before your discharge.
THESE CLASSES CAN BE DONE ON A COMPUTER or over the telephone. Many times the course can be broken up into segments if time is a problem.
The Means Test. This was made a requirement in 2005.
It was put in place to stop abuse of the bankruptcy provision.
What the Means Test does is compare your income 6 months prior to your filing to the state median average income as determined by the census bureau and the IRS.
IT LOOKS TO ASSESS WHETHER THERE IS A PRESUMPTION OF ABUSE.
Chapter 7 bankruptcy laws label the means test form b22a.
Below is a comprehensive overview of what is asked about your financial standing at the time of filing for bankruptcy.
This is concerned with those who do not have primarily consumer debt or disabled veterans. If you are a disabled vet and your debt problem is connected to being actively on duty and becoming disabled then you get the no presumption check right out of the gate.
Checking off your filing status (married or unmarried) or filing individually or jointly.Then listing all your types of income
You come to a grand total, multiply that by 12 for an annual average. This is compared to a chart the U.S. trustees have on record. According to the household size and this total puts you either in line for a Chapter 7 or not.
If you fall under that amount you can check the presumption does not arise and continue with the chapter 7 bankruptcy. If you did not fall under the amount needed you will then fill out PARTS 4-7
The marital adjustment. Income from a spouse that you can claim did not go toward the household such as child support from a previous relationship ect.
Goes on to the many deductions from income that are allowed using national standards for households of your stated size. Some of the categories are
Then there is a sub part B with additional living expense deductions
Subpart C is debt payments for secured debts
This is another determination of presumption
What this part of the test in chapter 7 bankruptcy laws does is figures the expenses you claim and multiplies them by 60 or (5 years). They are then subtracted from the income you originally stated. If your income goes in excess of $10,000. of what your expenses are projected to be, then you are not allowed a chapter 7 bankruptcy. You must move on to chapter 13.
The list of expenses is pretty comprehensive but are not based on your actual expenses but again on a national average according to the census and IRS.
Are again, some additional expense claims
Verification: you sign the document stating all statements are accurate and true under the penalties of perjury.
How the Chapter 7 Proceeds
Now that we have the requirements discussed, lets talk about how the actual chapter 7 bankruptcy proceeds once you have established that you qualify.
Let me stress right here that I fully recommend a competent attorney well versed in the chapter 7 bankruptcy laws.The means test alone is a challenging aspect but now comes the filing of papers and in the mean time some funny little snag you weren't expecting could occur.
The average person may not know how to take care of those extra little details and you will spend many hours trying to find the right person that can answer any questions you have. The court personnel are prohibited from answering legal questions, you will have to find legal resources in your area that may already be full of others waiting for help.
As you can see by studying the means test, usually there are not many non exempt assets in a chapter 7 bankruptcy. Most likely you have no real money at this point and have exhausted all your resources.
The literature that the U.S. bankruptcy courts put out says most bankruptcies are called no asset cases and there's mostly only paper work for the trustee to handle.
Next course of action the debtor pursues in the chapter 7 bankruptcy laws is to file the petition (or the bankruptcy filing) with the court nearest to their legal residing place.
Along with that petition the debtor files copies of
Also needed will be any payments made by employers in the last 60 days, any statements of anticipated increases or decreases in pay,expected inheritances, cash settlements,ect. At that time the filing and administrative fees are expected.
More Forms in Chapter 7 Bankruptcy
The forms filed out in the petition will also ask for
It is also noted that when the one filing is married even if they are filing individually the spouses income and expenses are still evaluated.
Once you have filed, the automatic stay will go into effect. This is where the bankruptcy court clerk will notify all the creditors you listed that you are in bankruptcy. Chapter 7 bankruptcy laws mandate that all collection attempts including telephone calls and letters, court cases and wage garnishments must stop.
There are certain actions that this may not stay and some that only act temporarily (such as foreclosure).
This is now the time to get the debt education course out of the way as it is a requirement of the discharge and you do not want any cause for dismissal.
Approximately 1 to 1 1/2 months later the meeting of creditors is arranged (called the 341 meeting).This may take place at the bankruptcy court or at some convenient public building (registry of deeds)with either a trustee or other court official.
It usually only takes about 10 minutes of your personal time though there may be many others attending and you wait your turn. Questions are asked about your personal hardship and your finances. All filers must attend this meeting. If spouses are filing jointly they both must attend.
Two weeks after the meeting of creditors the trustee will report to the court whether or not the presumption of abuse has arisen in the case according to the means test.
The trustee may ask for more documentation and may counsel you to ensure you know what you are getting into, but what I found is that if you have an attorney they may make the assumption that you have already been counseled especially if the attorney is well known.
Another possible reason for being or not being counseled is if you easily passed the means test. In that case chapter 7 is looked at as inevitable. If you are on the boundary line and can possibly take the chapter 13 or even with credit counseling possibly save the situation it may be the better course to take. So....no counseling with a clear cut chapter 7 otherwise counseling will be administered.
What can happen here is that you may find a different chapter could better serve your needs. If eligible you can convert to another chapter as long as you have not already previously done so. (That would be another abuse....using the courts to extend your case timing).
As previously stated most chapter 7 bankruptcies are no asset cases, but if from the beginning it appears you have assets to liquidate, then the creditors at this point have to file claims within 90 days of the 341 meeting. If it is a governmental creditor they have 180 days.
Note about debts discharged in bankruptcy
Take note that most unsecured debt will be relieved in Chapter 7 bankruptcy but there are some that will not.
In Chapter 7 bankruptcy laws one cannot remove liens placed on property.
With secured property the debt can be removed but the property still can be taken by the creditor.
OTHER TYPES OF DEBT NOT DISCHARGED ARE
Other debts which are actually obligations
Usually in 60-90 days the discharge will be issued unless an interested party files a complaint to object to the discharge or the court finds reason to dismiss (usually from not complying with submitting proper documentation or completing required courses or hiding assets or property).
Once the discharge is granted the debtor will receive documentation of the discharge from the court.
All debt listed at filing will be relieved.
Other considerations of the Chapter 7 Bankruptcy Laws
As many can relate financial situations can twist and turn and take direct 180's without prior knowledge of the event.
You may have secured property such as an automobile and in some instances a house that your circumstances change and you may now be able to work out some mutual agreement with the creditor to reaffirm the debt.
Reaffirming the debt is a mutual agreement between the creditor and the debtor that the debtor remain liable for payment but usually it is a reduced amount or only a portion of the original debt so long as the debtor pays and the creditor agrees not to seize the property.
In the case of a house it's usually a loan modification.
In official documents of the chapter 7 bankruptcy laws the debt is to be reaffirmed before the discharge occurs. Yet there are creditors that will still work to reaffirm a debt even after discharge though this may not officially be considered reaffirmation it certainly is possible.
The official reaffirmation comes with another set of agreements by the court and disclosures. If the court believes it will put undue hardship upon the debtor they may not approve of the reaffirmation.
If the debtor is represented by an attorney, he can strengthen the agreement by providing written certification that the debtor has been counseled of the consequences of default on the reaffirmation.
This may be why some creditors wait till after the bankruptcy discharge and create a new agreement of their own. If you don't like the new terms,you have already been discharged you do not have to accept them!!
Once the debt has been discharged the Chapter 7 bankruptcy laws prohibit Creditors from trying to collect or take legal action on that discharged debt.
Those that continue are subject to fines.
As one can see there is much to be considered in the chapter 7 bankruptcy laws.