Understanding Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most common form of bankruptcy for a reason. It's an extremely powerful debt relief option for folks who want to get out of debt and start over with a clean slate and fresh start.
Many debts can be completely eliminated by filing Chapter 7 bankruptcy, relieving folks of the obligation to continue paying on those debts, stopping creditor harassment, and allowing debtors to keep the money they used to pay toward their debts. Chapter 7 bankruptcy is the fastest, most powerful debt relief
option available to people struggling with overwhelming debt, although not everyone who wants to file Chapter 7 will qualify.
Below is a discussion about what factors you should consider if you're thinking about filing Chapter 7 bankruptcy, who qualifies for Chapter 7, what happens to your property when you file Chapter 7, and an overview of the process for filing a Chapter 7 bankruptcy, including a discussion about the automatic stay and meeting of the creditors (aka 341 meeting).
Is Chapter 7 Bankruptcy Right for You?
Chapter 7 bankruptcy does wonders to dramatically improve the lives of folks quickly, but it isn't right for everyone, but it when it's right for them. To make an informed decision about whether Chapter 7 is right for you, you'll want to start by knowing what kind of debt you have and how much, as well as what property you own or have co-signed for. You'll also need to be familiar with how much income you earn, particularly how much you've earned over the last six months.
Evaluating Your Financial Situation
You should consider filing for bankruptcy if you're overwhelmed by debt that you cannot realistically repay in the next three to five years. There isn't a magic amount of debt that makes bankruptcy make sense in every case. Every person's financial situation is different, causing the amount of debt that's "worth" filing bankruptcy to vary based on different factors such as amount and type of debt, family size, income, expenses, and working ability.
If you're considering bankruptcy it's important to honestly calculate your average monthly income and average monthly expenses, not including your unsecured debt. It's important to be thorough and realistic when calculating your average monthly expenses. Make sure you're not overlooking anything and make sure that you include necessities that come up but are often overlooked when budgeting, like copays, new shoes and clothes for the kiddos, and enough money to actually afford groceries and gas. Once you've done this you'll know how much money you have left over to put toward your debt. If that's not enough money for you to repay your debt in the next three to five years then you can't afford to repay your debt in that amount of time.
Depending on how close or far from repaying your debt that your new budget (yes, you just created a budget) tells you you'll be in three to five years, you can decide if you have enough debt for bankruptcy to be worth it. If you don't have enough money left in your budget to make on time payments that are more than the minimum payment (ideally they should be at least minimum payment + interest), then talking to an Austin bankruptcy lawyer to seek professional advice from our bankruptcy attorney makes sense.
Understanding the Pros and Cons
Chapter 7 bankruptcy is actually the most common form of debt relief in the U.S. The process typically lasts three to six months, allowing debtors to move forward quickly, while the automatic stay protects them from creditor harassment. However, Chapter 7 bankruptcy is sometimes called a liquidation bankruptcy because it may involve the liquidation of nonexempt assets to repay creditors. Despite this, many folks witness an improvement in their credit and can get approved for a mortgage within a few years of bankruptcy.
Benefits of Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy offers relief from unsecured debts, including credit card debt, medical bills, and personal loans. There is no payment plan with a Chapter 7 bankruptcy, so as long as debt qualifies as dischargeable debt then it's eliminated and the debtor never pays on the debt again. The automatic stay goes into effect immediately upon filing, providing a shield from creditor harassment by forbidding any attempts to collect debt from any person who's filed for bankruptcy. Debtors can stop making payments on their debts as soon as they file for Chapter 7 bankruptcy. Understanding the distinction between nonexempt and exempt property is crucial, as it determines what assets the trustee can sell to repay creditors. Debtors can safeguard essential assets through exemptions, such as their home, car, and retirement savings. Chapter 7 bankruptcy proceedings are generally resolved swiftly, enabling debtors to focus on rebuilding their financial future while making informed decisions about their well-being.
Drawbacks of Chapter 7 Bankruptcy
Not everybody can file a Chapter 7 bankruptcy. In order to qualify for a Chapter 7 you must disclose certain financial information to determine if you pass the means test or the majority of your debt must be business debt (this helps the owners of struggling small businesses). If you don't pass the means test then you'll have to consider a Chapter 13 bankruptcy instead.
Chapter 7 bankruptcy is sometimes referred to as a straight bankruptcy because it can lead to the liquidation of nonexempt assets, potentially impacting the debtor's property ownership. Moreover, it can result in a negative impact on the credit score and credit report of the individual. After filing for Chapter 7 bankruptcy, debtors might face challenges accessing the best interest rates, and will have to wait between two to four years before qualifying for a mortgage. Additionally, certain debts, including student loan debt, tax debts, and child support, may not be dischargeable in Chapter 7 bankruptcy. Understanding these potential drawbacks is crucial for individuals considering this debt relief option. It's important to carefully weigh these factors before making an informed decision about Chapter 7 bankruptcy.
Qualifying for Chapter 7 Bankruptcy
To qualify for Chapter 7 bankruptcy, you must meet specific eligibility requirements, including passing a means test. This test is intended to prevent high-income earners from qualifying and for Chapter 7 in most situations. If your average monthly income for the six months before filing is less than or equal to your state's median income, you automatically pass the means test. You can also qualify to file Chapter 7 bankruptcy if the majority of your debt is not consumer debt, which commonly is the case for folks who have business debt from a small business.
Folks who don't pass can consider filing for Chapter 13 bankruptcy instead.
What if I've Filed Bankruptcy Before
If you're previously filed bankruptcy then there are some waiting periods you need to be aware of before you'll be able to file again.
Chapter 7
If you're considering filing under Chapter 7 bankruptcy but you've previously filed bankruptcy then you'll need to be familiar with these waiting periods:
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If you've previously filed a Chapter 7 and you received a discharged, then you must wait eight years from when you received your discharge before you can file again.
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If you've previously filed a Chapter 13 and you received a discharge, then you must typically wait six years from when you received your discharge before you can file again.
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If you filed for bankruptcy but didn't receive a discharge, then you can usually file again but not always. Sometimes you may need to wait 180 days before filing, and your automatic stay may be shortened. It's important that you speak with an attorney if you find yourself in this situation.
Chapter 13
If you're considering filing under Chapter 7 bankruptcy but you've previously filed bankruptcy then you'll need to be familiar with these waiting periods:
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If you've previously filed a Chapter 7 and you received a discharged, then you must wait four years from when you received your discharge before you can file again.
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If you've previously filed a Chapter 13 and you received a discharge, then you must typically wait two years from when you received your discharge before you can file again.
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If you filed for bankruptcy but didn't receive a discharge, then you can usually file again but not always. Sometimes you may need to wait 180 days before filing, and your automatic stay may be shortened. It's important that you speak with an attorney if you find yourself in this situation.
What Happens to Your Property in Chapter 7?
Most folks wonder what will happen to their property if they file Chapter 7 bankruptcy, and the short answer is that we can protect a lot of property in Texas in a Chapter 7.
Exempt Property in Chapter 7
There are exemptions in the bankruptcy code and Texas and Federal law that protect certain property. These exemptions enable individuals filing for Chapter 7 bankruptcy to retain certain assets and start anew with reduced debt.
For the most part, we're going to be able to protect the home where you live, one vehicle per licensed driver in your home, furniture and other household items, clothes, retirement accounts, certain jewelry, tools and the trade, and athletic gear such as bikes. (see a more detailed list here).
Nonexempt Property in Chapter 7
Nonexempt property is that property that can't be safeguarded by bankruptcy exemptions. Examples may include "extra" vehicle, investment or vacation property. The bankruptcy trustee has the authority to take and sell (aka "liquidate") nonexempt property and use the money to distribute to creditors. It's crucial to understand if any of your property is nonexempt before initiating Chapter 7 bankruptcy proceedings. It is advisable to seek guidance from an Austin bankruptcy attorney who can identify which property is exempt or not so you can be fully prepared for every step of your bankruptcy.
The Process of Filing for Chapter 7 Bankruptcy
Initiating bankruptcy proceedings involves submitting a petition to the bankruptcy court, accompanied by detailed financial information that's contained in the schedules. The bankruptcy trustee may request additional documentation as part of the case review. Debtors are required to attend a meeting of creditors (aka "341 meeting") during the bankruptcy process, underscoring the importance of understanding the necessary forms and requirements for a successful filing.
Required Documentation and Fees
Gathering all financial records is essential when preparing to file for bankruptcy. To get started, you'll typically want to have tax returns for the last two tax years, credit reports, paystubs for the last six months (and the same thing for your spouse regardless if they live with you, regardless of whether they're filing), bank statements and credit card statements for the last 90 days, and copies of all of your most recent billing statements.
You also need to complete a credit counseling class from an approved credit counseling agency that's approved in your jurisdiction. These classes usually cost $20 to $30 dollars and can be taken over the phone or online.
A $338 case filing fee is due and must be paid to the court when you file your petition, unless you qualify for a waiver.
The 'Automatic Stay'
The automatic stay goes into effect the moment you file for bankruptcy under Chapter 7, halting all collection actions and creating potential penalties for violators. This includes preventing wage garnishment, debt repayment options any creditors may offer, and calls, texts, letters, emails, and any other communication from creditors regarding your debt (seriously, a lot of creditors actually stop sending bills when you file bankruptcy just so they don't get accused of violating the automatic stay). It also stops filing lawsuits, collection calls, and foreclosure proceedings.
The automatic stay provides essential relief for many folks who are hoping to free themselves from the constant harassment from creditors.
The Role of the Bankruptcy Trustee
The trustee plays a crucial role in the bankruptcy case by thoroughly reviewing your petition and schedules, as well as requesting additional financial documents to review prior to the 341 meeting. It's essential to pay close attention to all trustee requests for documents, as failing to provide requested documents may lead the trustee to recommend to the bankruptcy judge that your case be dismissed.
The trustee conducts the 341 meeting where they ask you questions about your petition, schedules, and financial situation over the last several years. Their role is to make sure that you're being honest aren't hiding anything. They're not there to trip you up or stress you out, but they're role is to maximize any proceeds for your creditors. And to that end they double and triple check that everything is as you say it is.
After the Meeting of Creditors
If your trustee determines that your case is a "no asset case," which the majority of Chapter 7s are, then they'll usually file a "No Distribution Report" shortly after your 341 meeting. This is great news and typically means that you only need to wait about 2 more months before your receive your bankruptcy discharge.
However, your trustee may request additional documents after your creditor meeting, and they may continue your 341 meeting at a later date if they want to have you answer questions based on the additional documents you provide. The trustee may also file objections to discharge if they see fit, but most of the time if you've been honest with yourself and your bankruptcy lawyer then you should be prepared for this situation when it arises.
Types of Debts that Can Be Discharged in Chapter 7 Bankruptcy
Chapter 7 bankruptcy allows you to keep exempt assets while having your unsecured debt discharged, all without you having to participate in a repayment plan like with a Chapter 13 bankruptcy.
The most common types of unsecured debt that gets discharged in Chapter 7 include card debt, payday loans, certain tax debts, medical bills, personal loans, and debts incurred from family and friends.
Debts that Remain After Discharge
Not all debts can be eliminated in Chapter 7 bankruptcy. Of course, any debt for secured property that you choose to keep will not be eliminated in bankruptcy.
Additionally, there's a special class of unsecured debt called "priority unsecured debt" that can't be discharged. Common examples of priority unsecured debts include child support, spousal support, certain tax debts, criminal penalties and fines from driving while intoxicated, wage and hour claims by employees, and payroll taxes, just to name a few.
Conclusion
Chapter 7 bankruptcy provides individuals with a fresh start by eliminating most of their unsecured debts.
If you're still considering the types of bankruptcy and whether bankruptcy is the right option for you, you should start by reviewing your average monthly income and expenses, and how much all of the payments for your monthly debt adds up to. If you can't cover your expenses without going further into debt and repay your debt in the next three to five years then bankruptcy may be a really good option for you.
It is important to understand that bankruptcy law is complex and involves more than just completing certain bankruptcy forms correctly. Federal bankruptcy law in the United States is fairly complex, and it incorporates various state laws throughout the country, so it's important to make sure you speak to an Austin bankruptcy lawyer if you're in Central Texas or a bankruptcy lawyer in your area of you're located elsewhere in the country. Overall, consulting with a bankruptcy attorney can provide you with the guidance you need for a successful Chapter 7 bankruptcy filing.