What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is often the fastest and cheapest type of debt relief that exists. It's a legal process that eliminates qualified unsecured debt, including credit card debt, medical bills, toll bills, personal loans, and payday loans. The entire process usually lasts about four to six months from start to finish.
One of the benefits of Chapter 7 bankruptcy includes the automatic stay that goes into effect as soon your case is filed, preventing creditors from attempting to collect a debt from you. Another key benefit of Chapter 7 is the elimination of debt without a repayment plan. Unlike a Chapter 13 bankruptcy, which includes a three to five year repayment plan, Chapter 7 bankruptcy is sometimes referred to as a liquidation bankruptcy because the trustee can take and sell and nonexempt property for the purpose of distributing the proceeds to your creditors. However, the majority of Chapter 7s are referred to as "no asset" cases, because all of the property owned by the debtor(s) can be protected with bankruptcy exemptions, leaving nothing unprotected for the trustee to take and sell.
How Does Chapter 7 Work?
Filing bankruptcy is a process that usually begins a month or two before you every file your bankruptcy petition with a United States Bankruptcy Court, regardless of the type of bankruptcy you're filing. Here are step-by-step guide to some bankruptcy basics.
Assessing Your Financial Situation
Before even deciding which bankruptcy chapter you're going to file under, the first thing you need to do is assess your financial situation. Specifically, you'll want to take a close look at all of the income you've received over the last six months and you'll want to categorize your debt and calculate the total for each category. Doing this allows you to make answer two important questions:
Do I qualify for Chapter 7 bankruptcy?
Will filing Chapter 7 bankruptcy help me get out of debt?
Knowing how much income you've received over the past six months will help you figure out if you qualify for Chapter 7 bankruptcy. Categorizing your debt is important because only qualifying unsecured debt can be discharged, so it's essential to understand if the debt that's causing you to be overwhelmed is eligible to be discharged in Chapter 7.
Income Requirements for Chapter 7 Bankruptcy
The means test gets all the attention when we discuss how to qualify for Chapter 7 bankruptcy, and it's true that passing the means test is one of the ways you can qualify for Chapter 7. However, most folks who file Chapter 7 bankruptcy are eligible to do so because their income is at or below the median income in their state, which actually exempts them from the requirement to even complete the means test. The U.S. Census Bureau releases new income requirements three times a year and you can find the most recent data here on the website for the U.S. Department of Justice.
Another common way that folks end up qualifying for Chapter 7 is when the majority of their debt is non-consumer debt, which usually happens when the debtor(s) personally guaranteed debt for a business. If you're considering using this method to qualify for Chapter 7, you'll want to note that the trustee is going to look closely at how much disposable income you have at the end of each month. If the trustee deems that your disposable income is too high then your case may be dismissed or you could be forced into a Chapter 13 bankruptcy instead.
Collecting the Paperwork
The bankruptcy code, bankruptcy judge, and bankruptcy trustee all require a lot of specific information to be present in your bankruptcy paperwork. This means that you're going to need to spend some time collecting all of the financial documents and paperwork containing that specific information. Although every bankruptcy case is different, we generally request our clients to provide us with the following:
Pay stubs and all other income documents for the last six months
Tax returns for the previous two years (if required to file)
Bank statements for the last six months
Credit card statements for the last three months
All financing agreements
All debt collection letters
A list of all personal property with corresponding values
All three credit reports
Preparing the Bankruptcy Forms
Preparing the bankruptcy forms is arguably the most crucial step in the Chapter 7 bankruptcy process. These forms provide detailed financial information about your income, expenses, real estate and other assets, and each category of your debts. You must complete these forms accurately to have a successful bankruptcy, and if you discovery any errors later you have an obligation to amend any errors by filing updated bankruptcy paperwork and serving the amendments on all of your creditors and the trustee. Completing these forms can appear deceptively easy, and mistakes can lead to your case being dismissed without you receiving a bankruptcy discharge. Although there's no requirement that you hire a bankruptcy lawyer to assist you in preparing your case, it's certainly advisable to have a knowledgeable professional on your side to help you get the full benefit of your bankruptcy.
Credit Counseling Requirement
Nearly everyone who files bankruptcy has to complete credit counseling within 180 days before filing their petition. There are many approved credit counseling agencies throughout the country who offer this course, and you can use this page to find a list of approved credit counseling agencies.
Filing the Petition
After you've completed your credit counseling class and prepared the bankruptcy forms, you're ready to file your case with the court. Our office uses electronic filing to submit the paperwork, and we also use the same online portal to submit the $338 filing fee for Chapter 7 bankruptcy that's typically due at the time of filing. Individuals who are unable to afford the filing fee may request a fee waiver or apply to pay the fee in installments.
Usually within minutes of filing the petition, we receive your bankruptcy case number, trustee assignment, and notice of when your 341 meeting will be held.
Debtor Education Course
Similar to the requirement that you complete a credit counseling course prior to filing bankruptcy, you must complete a debtor education couse after you file but before you receive your discharge. You must complete a course from an approved debtor education agency. You can use the tools on this webpage to find a list of approved debtor education agencies in your area.
341 Meeting (aka "Meeting of Creditors")
The 341 meeting is typically the last remaining hurdle to clear after filing your bankruptcy petition. The purpose of the meeting is for the trustee to verify the accuracy of your bankruptcy paperwork, to determine if you qualify for Chapter 7 bankruptcy and if there's any property for the them to take and sell, and to ensure that the bankruptcy process is fair for all parties. You can read more about 341 meetings, how to prepare, and a list of common questions asked by trustees on our blog.
Although the name clearly implies that your creditors will show up to this meeting, it's actually unusual for creditors to actually attend. However, if any of your creditors do show up, they're permitted to ask you questions related to your debt with them, any corresponding property, and any elements from your bankruptcy paperwork that may impact the debt they hold and their ability to be repaid.
Bankruptcy Discharge
The bankruptcy discharge is what provides you with a fresh start and an opportunity to rebuild credit and achieve financial stability. It usually happens about two months after your 341 meeting. You'll receive your discharge in the mail, and it's an official court order eliminating your legal obligation to repay certain qualifying dischargeable debts.
It is important to note that not all debts are eligible for discharge, such as child support obligations, alimony, and recent tax debts. However, most unsecured debts, such as credit card debt and medical bills, are discharged in Chapter 7 bankruptcy.
Do you Have to Go to Court for Chapter 7 Bankruptcy?
You don't have to go to court in a standard Chapter 7 bankruptcy in Central Texas. Everything is taken care of electronically and over the phone. For instance, 341 meetings are conducted on a conference call. In those cases where a creditor objects to a discharge (they can either object to discharging a particular debt or to the entire discharge), the creditor will file a separate lawsuit in the bankruptcy court called an adversary proceeding. It's very likely that you'll end up in court if an adversary proceeding is filed.
Can I File Chapter 7 Without a Lawyer?
Yes, you can file a simple Chapter 7 bankruptcy on your own. In fact, you can file any personal bankruptcy on your own (Chapter 7 or Chapter 13), but it's just not advisable. Although the bankruptcy paperwork consists of standard forms that may appear simple to complete, this simple appearance is deceiving. Bankruptcy law is made up of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and a variety of Federal and State laws, not to mention the volumes of case law that exist interpreting these different laws and creating differences in how bankruptcy law is applied in different jurisdictions throughout the country.
Here's another way to think about it. You're filing bankruptcy to get rid of overwhelming debt. This usually means you're going to have tens of thousands of dollars of debt eliminated. How much will your life improve when you don't have to worry about your debt any longer? How much do you value getting rid of your debt and having a real fresh start? The price you pay your attorney is going to be a small fraction of the debt you get discharged, but hiring a bankruptcy attorney will give you the comfort of knowing that your bankruptcy case is being handled correctly and that bankruptcy law isn't being overlooked.
Can I File Chapter 7 and Keep My Car?
Yes, we can use the Texas bankruptcy exemptions to protect one car per licensed driver in your house. This exemption protects your car(s) regardless whether you own it outright or are still paying on it.
Schedule Your Free Consultation Today
Filing Chapter 7 bankruptcy is major decision that you can benefit from significantly if you're struggling with overwhelming debt. It's typically the fastest and cheapest way to get rid of your debt and eliminate unsecured creditors from your life. It wipes the slate clean and gives you a fresh start and the opportunity to start working on rebuilding your credit score shortly after receiving your discharge. One of the things I say frequently is that when a bankruptcy filing makes sense, it typically makes more sense than any of the other choices available to you. If you're struggling with overwhelming debt and looking for a fresh start, reach out to us today to schedule your free consultation today to make sure that you get legal help and legal advice from local qualified bankruptcy professionals.