Chapter 7 bankruptcy is for individuals and married couples who are suffering financial hardship. They are often unable to pay bills and have accumulated significant debt, and may be facing court judgments and wage garnishments. Chapter 7 debtors typically have few assets and seek to “discharge” their debts and get a fresh start.
What debts can be discharged?
In short, most unsecured debts can be discharged, including credit card debt, medical bills, legal fees, outstanding tuition and utility bills. Wage garnishments can be stopped, and most court judgments can be discharged as well.
Back taxes typically cannot be discharged, although there are exceptions. Student loans can be discharged in unusual circumstances. Fines owed to courts for criminal matters and other government fines typically cannot be discharged, but you should review this with your attorney.
Who can file?
Not everyone is eligible to file a Chapter 7 bankruptcy. If you have a certain level of income, you may have additional hurdles to cross before your case can move forward. The income formula is complicated and varies based on how many dependents you have and other considerations. That said, the income number is relatively high and usually doesn’t disqualify those who need to file.
Businesses may file for Chapter 7 protection as well.
Do you have a car?
In chapter 7 bankruptcy, you can keep your car if you continue to make the monthly payments. Most folks need their car and want to keep it, so this is good news. You cannot discharge the loan debt and keep the car too. (Else everyone would be filing, right?)
Typically the Chapter 7 process allows you to work out a new deal with the bank, called a reaffirmation agreement. If your car was a fairly recent purchase, the terms of the new agreement likely will be similar to your original loan terms.
Do you own a home?
Chapter 7 debtors are often far behind on their mortgage payments and possibly in foreclosure. If so, the Chapter 7 process will stop the foreclosure action temporarily, but not save your home in most cases. Each case is different, however, and whether a modification or other resolution is possible depends on many factors. If your home has significant equity, a Chapter 7 is typically not the right option.
You should review these issues at length with your attorney.
Will I lose my savings?
The bankruptcy code allows debtors to keep some cash and property and does not strip them of all their assets to pay creditors. If you have more than $12,000 on hand (I wish, say most folks) a Chapter 7 filing may be problematic, but not impossible.
The essence of the bankruptcy process is this: If you have a certain level of income and assets, you should be using them to pay your creditors back, instead of seeking discharge of your debts. Your attorney will review these rules with you and advise you on the best course of action.
You also need cash on hand to pay the court filing fee for Chapter 7 (currently $335) and your attorney fees. Attorney fees are generally payable in full before filing, otherwise your attorney becomes a creditor, complicating the process.
Do you need a lawyer?
I would argue yes. There are self-represented debtors in bankruptcy, and often their case goes well, but the bankruptcy process can be complicated. I’ve rarely had a client who didn’t have a number of questions that needed review before a successful filing was a certainty.
And the fees for Chapter 7 are not onerous. It’s usually worth the cost to have someone prepare your petition, represent you at the “meeting of creditors” and guide through the entire process, saving you much time, stress and uncertainty.
If someone is bankrupt, how can they pay attorney and court fees?
Often a Chapter 7 debtor has a job and even some savings. But the income is no longer sufficient to pay the monthly bills. Perhaps the debtor is holding off a creditor here or there. Or has stopped making the monthly payments on the credit cards. The debtor typically desires to clear the unsecured debt and get a fresh start.
How does the process work?
After gathering all your paperwork, you work with your attorney to complete the bankruptcy petition and schedules and other documents. You determine your income and expenses, your assets and liabilities, and report this information on the bankruptcy filing.
You also must complete a credit counseling course before filing. This takes about an hour.
After your attorney files for you, the “meeting of creditors” is scheduled by the bankruptcy clerk’s office. You meet with the trustee for your case and answer questions about your financial matters. If all goes well, the trustee signs off on the case, and you receive your discharge thereafter.
If you have any questions or would like a free consultation, call my office anytime at 973-953-7797.