Chapter 7 Bankruptcy Basics
Chapter 7 is often called the “fresh start” bankruptcy. It is also known as “liquidation” or “no asset” bankruptcy. The goal in filing for Chapter 7 is to provide a clean slate for a debtor, allowing them to retain exempt property and receive a “discharge” that pays off as many debts as possible. The debtor’s non-exempt property and assets are sold by a trustee and the money is used to pay creditors. Creditors are then prohibited from collecting the remaining debt from the debtor. Exemptions are different from state to state, with varying amounts exempted in the case of motor vehicles and homes.
Chapter 7 is designed to help lower income wage earners (individuals, married couples, or small business owners) who have little or no assets. A “means test” is required to ascertain whether a debtor meets the requirements and prevents higher wage earners from abusing the provisions of Chapter 7. Chapter 7 is often an option for holders of upside-down mortgages (whose home is worth less than is owed) because the remaining balance of the mortgage is eliminated after foreclosure.
Most unsecured debts can be discharged, or erased, through Chapter 7. Unsecured debts are those which have been acquired without a lien; in other words, there is nothing for the creditor to take back from the debtor if payments are not made. Unsecured debts include things like hospital or medical bills; credit card debt; and utility bills. Back rent may be included in the items for discharge, although if the debtor is unable to continue paying future rent, the bankruptcy discharge does not prevent eviction. Some secured debts may also be discharged in a bankruptcy settlement. If a debtor agrees to surrender their car or house, for example, the remaining payments will be discharged.
There are a number of debts which cannot be discharged through Chapter 7, including any credit or money obtained through fraudulent means. Also ineligible for discharge are student loans, child support, alimony, cash advances obtained within 70 days of filing, and any luxury goods or services purchased within 90 days of filing. Certain fines or penalties owed to government agencies cannot be discharged, and some tax debts are also ineligible. Your attorney will be able to give you guidance on the tax stipulations. Further, any restitution due for DUI convictions cannot be discharged through Chapter 7.
The process for Chapter 7 generally can be completed in 4-6 months. The first step is to undergo debt counseling. Upon completion, you will receive a certificate and a debt repayment plan that you will present with your petition for bankruptcy. The next step is the means test, as mentioned above. To qualify for Chapter 7, you will need to show that your current monthly income is less than the median income for a household of your size. If you pass this part of the test, you can proceed with the filing; if not, you will need to complete the second phase of testing, showing that you do not have enough money left over each month to pay at least a portion of your unsecured debts. If you do not pass the means test, you will need to consider Chapter 13 instead.
If you pass the means test, you may file for Chapter 7. After submitting documentation about your financial situation and creditors, and paying the proper fees, a trustee will be appointed. At this point a “stay” is placed, preventing creditors from attempting to collect monies due while the proceedings are active. An estate is created and becomes the temporary legal owner of your assets, until they are sold to pay your creditors. If you wish to retain any property, such as a car, you must file an affirmation to show that you are able to continue making payments. The affirmation must be filed before the discharge is entered. Once all creditors are paid, the debtor will finally have the fresh start they sought, released from liability and protected from creditors who can no longer take action to collect debts.
The decision to file Chapter 7 is a very private matter and the process can be overwhelming. Call the Law Office of Erik Severino to arrange a free 30-minute introductory appointment. Your case will be handled with personal attention and a commitment to provide you with resolution, protection, and integrity. Erik Severino attained a degree in economics from the University of Nevada, Las Vegas, and his Juris Doctorate from the William S. Boyd School of Law, UNLV. Licensed to practice in Nevada since 2006, he has concentrated exclusively on Consumer Bankruptcy Law since 2009, and in 2016 was awarded the Avvo Clients’ Choice Award.