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Chapter 7 Individual Bankruptcy

Many people considering filing bankruptcy want to know what is Chapter 7 bankruptcy. Chapter 7 is the most common type of bankruptcy  filed in the United States. Chapter 7 refers to the chapter of the Bankruptcy Code which can be found in Title 11 of the United States Code. Chapter 7, commonly known as liquidation bankruptcy, involves the sale of a debtor’s non-exempt assets by a trustee. Any proceeds obtained by the bankruptcy trustee are then turned over to creditors.   Generally speaking, most individuals do not have assets that the trustee will sell in Chapter 7, but this determination can only be made after speaking with an attorney.  To speak with an attorney now, click here.  To learn more about Chapter 7 bankruptcy, read on.  To learn about business chapter 7 bankruptcy (corporate chapter 7 bankruptcy), click here.

 For individuals

In a Chapter 7 bankruptcy, an individual is allowed to keep certain exempt property, but to the extent there is any nonexempt property, a chapter 7 trustee is authorized to sell such property and use the proceeds to pay creditors. Most liens, such as real estate mortgages and security interests for car loans, continue as liens against the debtor’s collateral, despite the debtor being individually discharged from such debts. The value of property that can be claimed as exempt varies from state to state. Other assets, if any, are sold (liquidated) by the trustee to repay creditors. Many types of unsecured debt are  discharged by the bankruptcy proceeding, but there are various types of debt that are not discharged in a Chapter 7, such as child support, income taxes less than 3 years old, property taxes and most student loans. Despite their potential non-dischargeability, all debts must be listed on bankruptcy schedules.

A chapter 7 bankruptcy stays on an individual’s credit report for 10 years from the date of filing the chapter 7 petition. This contrasts with a chapter 13 bankruptcy, which stays on an individual’s credit report for 7 years from the date of filing the chapter 13 petition. This may make credit less available and/or terms less favorable, although high debt can have the same effect. That must be balanced against the removal of actual debt from the filer’s record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict.

Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor’s Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.

It is widely held amongst bankruptcy practitioners that the U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings.  Through these activities the U.S. Trustee has achieved a regulatory system that Congress and most creditor-friendly commentors have consistently espoused, i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.

Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only a few of many issues to be considered in determining whether to file bankruptcy. The importance of the effects of bankruptcy on creditworthiness is sometimes overemphasized because by the time most debtors are ready to file for bankruptcy their credit score is already in bad shape. Also, new credit extended post-petition is not covered by the discharge, so creditors may offer new credit to the newly-bankrupt.

A bankruptcy attorney can advise the consumer on when the best time to file is, whether they qualify for a chapter 7 or need to file a chapter 13, ensure that all requirements are fulfilled so that the bankruptcy will go smoothly, and whether the debtor’s assets will be safe if they file. The Callan Law Firm, P.C. is an experienced bankruptcy law firm well qualified to advise you of your bankruptcy options and rights.  Contact us now to schedule an appointment with a bankruptcy attorney.

With expanded requirements of the BAPCPA bankruptcy act of 2005, filing a personal chapter 7 bankruptcy is complicated. Many attorneys that used to practice bankruptcy in addition to their other fields, have stopped doing so due to the additional requirements, liability and work involved. After the petition is filed, the attorney can provide other services.

2005 Bankruptcy Law Revision: the BAPCPA

On October 17, 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect. This legislation was the biggest reform to the bankruptcy laws since 1978. The legislation was enacted after years of lobbying efforts by banks and lending institutions and was intended to prevent abuses of the bankruptcy laws.

The changes to Chapter 7 were extensive.

Means test

A debtor must successfully pass the means test calculation to complete a chapter 7 bankruptcy.  This test, which was added to the Bankruptcy Code in 2005, calculates whether you are able to afford, or have the “means” to pay your debts. The means test annualizes your income for the past six months and compares it with the median income for your place of residence. The means test also includes your secured debt in determining whether you can afford to pay for your debts. If you fail to pass the means test, you can only file Chapter 7 bankruptcy under very specialized exceptions.  To learn more about the Means Test, click here.

Credit counseling

Another major change to the law enacted by BAPCPA deals with eligibility. §109(h) provides that a debtor will no longer be eligible to file under either chapter 7 or chapter 13 unless within 180 days prior to filing the debtor received an “individual or group briefing” from a nonprofit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator.

The new legislation also requires that all individual debtors in either chapter 7 or chapter 13 complete an “instructional course concerning personal financial management.” If a chapter 7 debtor does not complete the course, this constitutes grounds for denial of discharge pursuant to new §727(a)(11).

Meeting of Creditors

After a Chapter 7 bankruptcy is filed, the court will issue a document giving notice of a debtor’s Meeting of Creditors. This notice is also sent to all of the creditors that are listed within the bankruptcy documents. During the Meeting of Creditors, the bankruptcy trustee will ask the debtor various questions about the bankruptcy, such as whether all of the information contained within the bankruptcy documents are true and correct. The trustee may ask other questions about a debtor’s financial affairs. If the trustee wishes to investigate the bankruptcy further, he may continue your Meeting of Creditors to a future date. On the other hand, the trustee may conclude the meeting on the first meeting. It is important to note that at the Meeting of Creditors, as the name suggests, any creditor may appear and ask a debtor questions about his bankruptcy and finances, but this is exceedingly rare.  In Virginia, the conclusion of the Meeting of Creditors marks the beginning of the five day period in which a homestead deed can be filed to protect a debtor’s assets.  To learn more about homestead deeds, click here.

Applicability of exemptions

BAPCPA attempted to eliminate the perceived “forum shopping” by changing the rules on claiming exemptions. Under BAPCPA, a debtor who has moved from one state to another within two years of filing (730 days) the bankruptcy case must use exemptions from the place of the debtor’s domicile for the majority of the 180 day time period preceding the two years (730 days) before the filing §522(b)(3).  If the new residency requirement would render the debtor ineligible for any exemption, then the debtor can choose the federal exemptions.

BAPCPA also “capped” the amount of a homestead exemption that a debtor can claim in bankruptcy, despite state exemption statutes. Also, there is a “cap” placed upon the homestead exemption in situations where the debtor, within 1215 days (about 3 years and 4 months) preceding the bankruptcy case added value to a homestead. The provision provides that “any value in excess of $125,000” added to a homestead can not be exempted. The only exception is if the value was transferred from another homestead within the same state or if the homestead is the principal residence of a family farmer (§522(p)). This “cap” would apply in situations where a debtor has purchased a new homestead in a different state, or where the debtor has increased the value to his/her homestead (presumably through a remodeling or addition).  In Virginia, this cap provision is not applicable as the Virginia homestead exemption is limited to $5,000.00 a debtor in most cases.  Va. Code Ann. 34-4.

Lien avoidance

Some types of liens may be avoided through a chapter 7 bankruptcy case. However, BAPCPA limited the ability of debtors to avoid liens through bankruptcy.  The most significant change was that debtor’s ability to cram down the mortgages against their principal residence was extremely limited.  In Virginia, a first mortgage against a debtor’s principal residence cannot be crammed down, but a second or third mortgage (or 4th or 5th for that matter) can be stripped from the home, if it is completely unsecured, i.e. has not equity against which it can attach.  This is a fairly nuanced area of law and you should speak with an attorney to learn about your lien stripping options.

Other changes

  • Decreased the number and type of debts that could be discharged in bankruptcy. Decreased limits for discharge of debts incurred discharging luxury goods. Expanded the scope of student loans not dischargeable without undue hardship.
  • Increase the time in which a debtor may have multiple discharges from 6 to 8 years.
  • Limited the duration of the automatic stay, particularly for debtors who had filed within one year of a previous bankruptcy. Automatic stay may be extended at the discretion of the court.
  • BAPCPA limited the applicability of the automatic stay in eviction proceedings. If the landlord has already obtained a judgment of possession prior to the bankruptcy case being filed, a Debtor must deposit an escrow for rent with the Bankruptcy Court, and the stay may be lifted if the Debtor does not pay the Landlord in full within 30 days thereafter, §362(b)(22). The stay also would not apply in a situation where the eviction is based on “endangerment” of the rented property or “illegal use of controlled substances” on the property, §362(b)(23).
  • BAPCPA enacts a provision that protects creditors from monetary penalties for violating the stay if the debtor did not give “effective” notice pursuant to [§342(g)]. The new notice provisions require the debtor to give notice of the bankruptcy to the creditor at an “address filed by the creditor with the court,” or “at an address stated in two communications from the creditor to the debtor within 90 days of the filing of the bankruptcy case.

Seizure of Assets

If you have any non-exempt property, the bankruptcy trustee has the ability to seize and sell the property. Exemptions refer to federal or state statutes which allow a debtor to keep certain types of property from seizure in bankruptcy or to satisfy a judgment. For example, exemptions exist to protect retirement accounts, such as a 401(k) plan and, in Virginia, a debtor may claim a $6,000.00 exemption in a motor vehicle.  To learn more about Virginia exemptions and the Trustee’s authority to sell certain assets, click here.

Discharge

If neither the trustee, nor any creditor objects to the debtor’s discharge, the bankruptcy court will give the debtor a discharge at some point after the last day to object. The last day to file a complaint objecting to a debtor’s discharge is 60 days after the first session of the Meeting of Creditors. If no complaint is filed, the discharge is usually entered several days later. The discharge prevents creditors from attempting to collect any debt against the debtor, personally, that arose prior to the filing of the bankruptcy. Thus, for all intents and purposes, the discharge effectively cancels out debts. However, it is important to note that not all debts are dischargeable, including, but not limited to certain taxes and child or spousal support obligations.  Furthermore, a bankruptcy discharge is personal. This means that a creditor can still collect on a discharged debt from a co-debtor that did not file for bankruptcy.  To learn more about nondischargeable debts, click here.

To speak with an attorney now about your financial circumstances and whether Chapter 7 makes sense for you, call (914) 483-7769 or email our firm.