There are many different Chapters of bankruptcy that a debtor may file for, such as Chapter 7, Chapter 13, Chapter 9, and Chapter 11. The Chapter of bankruptcy that a debtor or entity chooses to file will depend on the requirements provided by the U.S. Bankruptcy Code. For example, only individuals are allowed to file for Chapter 13 bankruptcy. As such, if a business is filing for bankruptcy, they will most likely file it as a Chapter 11 proceeding.
Chapter 7 is the most common type of bankruptcy filing. It is ideal for debtors with low income, who have high amounts of unsecured debt, and need a quick form of relief. Those who successfully file for Chapter 7 bankruptcy and receive a discharge will be permanently released from having to pay their debts.
Therefore, if you have racked up a lot of debt due to unpaid credit card or medical bills, you may want to consult a local bankruptcy attorney to find out whether filing for Chapter 7 bankruptcy is the right move for you. Oftentimes, bankruptcy is used as a last resort and comes with many consequences. A bankruptcy attorney can apprise you of all the associated risks and benefits.
Who Qualifies for Chapter 7 Bankruptcy?
Only debtors who meet certain income criteria will be eligible to file for Chapter 7 bankruptcy. In order to qualify, the petitioner’s income must be equal to or fall below the median income in their state. This is known as the “bankruptcy means test.” Median incomes used in the means test can vary widely from state to state. Thus, it is important to check the income requirements of a particular state.
If the petitioner’s income is above the median income requirement in their state, then a second test will be conducted that measures their income against their monthly essential expenses (e.g., groceries, medications, etc.).
The court will use the results of the means test and/or the essential expenses test to determine whether the petitioner qualifies for Chapter 7 bankruptcy. Those who fail to qualify for Chapter 7 bankruptcy, may still be eligible to file for Chapter 13 bankruptcy.
Aside from the income requirements, a petitioner filing for Chapter 7 bankruptcy must also have first attended credit counseling before filing, must not have attempted to defraud creditors or the court, must not have had a debt discharged under Chapter 7 bankruptcy within the past eight years, and must fulfill a few other conditions.
Although filing for bankruptcy should generally be avoided, filing for Chapter 7 bankruptcy provides better benefits to debtors than those who file for Chapter 13 bankruptcy. For instance, a debtor who successfully satisfies the requirements of a Chapter 7 bankruptcy filing can have their debts completely discharged via a court order.
On the other hand, a debtor who files for Chapter 13 bankruptcy, must repay their creditors in accordance with a three to five year plan.
Additionally, unlike debtors who file for Chapter 13 bankruptcy, those who file for Chapter 7 bankruptcy can receive immediate and permanent relief, will most likely get to keep the majority of their property, and they will not need to make a repayment plan since creditors will no longer be able to collect on the debt.
This also means that the debtor will be allowed to keep their future income, instead of having to pay it back as part of their Chapter 13 repayment plan.
How to File for Chapter 7 Bankruptcy
The first thing that an individual should do when filing for Chapter 7 bankruptcy is to compile their financial records and make a list of all their debts, assets, income, property, liabilities, and expenses. They should also review what types of property are exempt from bankruptcy in their state and which kinds of debt are not dischargeable in a bankruptcy proceeding.
Once this is complete, federal bankruptcy law requires that a debtor attend credit counseling sessions within 180 days before filing for bankruptcy. At the end of counseling, the debtor should receive a certificate of completion that proves they completed this requirement. If a debtor fails to obtain this certificate, then the court will reject their bankruptcy filing outright.
After credit counseling is complete, the debtor may file a bankruptcy petition with a federal bankruptcy court. If the court grants the petition, the case will then be assigned to a court trustee who will schedule a meeting of the creditors. The debtor must attend this meeting and answer any questions that the trustee has about the case. The debtor will also have to attend a second debtor education course before a decision is made.
When all of the above steps are finished, the court will determine whether or not to issue a discharge order. Debtors who receive a discharge order will be protected against future collections and will no longer be obligated to pay their pending debts.
How to File for Chapter 7 Bankruptcy Online
Filing bankruptcy Chapter 7 online is not generally recommended. Bankruptcy filings involve a lot of strict requirements, procedures, and confusing laws. The average cost of filing for Chapter 7 bankruptcy is $335. If a mistake is made in the process, the cost of reopening a case will be an additional $260 or more depending on if a lawyer is needed.
The steps to file for Chapter 7 bankruptcy online are mostly the same as what is required of those who choose to use a lawyer to file or file in person with the court. This means that the individual must understand how to take the means test, evaluate their finances and assets, and be sure that Chapter 7 is the appropriate Chapter of Bankruptcy to file.
Additionally, not every state allows individuals to file for Chapter 7 bankruptcy without a lawyer. Thus, a debtor must check state laws to see if this service is even offered in their state.
Once a debtor files a petition for Chapter 7 bankruptcy, a federal bankruptcy court will immediately issue an “automatic stay.” An automatic stay is an injunction that prevents creditors from collecting or suing a debtor over debts owed. The injunction does not discharge a debt, however, it only suspends proceedings to collect or sue on the debt until the stay is lifted or the bankruptcy case is closed.
In addition, it also prohibits the creditor from sending collection letters, calling a debtor, garnishing wages from a debtor’s paychecks, repossessing property, foreclosing on a debtor’s home, or any other activities typically associated with debt collections. The automatic stay order will remain in place until a final decision is made.
The Appointment of a Trustee
In general, a trustee is typically defined as a person who has a legal obligation to oversee or distribute certain properties under specific circumstances. Thus, it stands that in a Chapter 7 bankruptcy proceeding, an appointed trustee is an individual who manages the assets and/or property of the debtor while they are continuing to pay off any debts still owed to their creditors.
In addition, a trustee in a Chapter 7 bankruptcy case may also be responsible for reviewing the bankruptcy petition and supplemental filing claims, monitoring transfers and security interests, and converting assets into cash (i.e., liquidation), which is then used to clear the petitioner’s debts.
A trustee may be appointed either by the bankruptcy court hearing the case, or sometimes by the creditors. Chapter 7 trustees, also known as “panel trustees,” are chosen from a local panel that the U.S. Trustee assigns to each district. Although the court ultimately appoints a trustee during a bankruptcy proceeding, they are usually assigned through a blind rotation process.
Debtors, but not necessarily the creditors, must meet with the trustee assigned to their case at the “meeting of the creditors,” which is sometimes informally referred to as a “341 meeting” due to the section it falls under in the U.S. Bankruptcy Code. During the 341 meeting, the creditors will decide if they want to elect a permanent trustee or if the court-appointed interim trustee will become the permanent trustee for the remainder of the case.
If the creditors decide to elect a new person to become the permanent trustee, they must do so at the 341 meeting. However, only certain types of creditors are allowed to request a new trustee. In order to be eligible to appoint a new trustee, the creditor must hold at least twenty percent of the amount owed by the debtor, the amount must be specific and undisputed, the debt must not be tied to any property (i.e., unsecured debt), and the creditor must not be considered an insider.
Finally, in situations where the creditor does not wish to appoint a new trustee or if the creditor is not eligible to vote for one, then the interim trustee assigned by the court will oversee the liquidation of assets and distribute payments to the creditors until all debts are satisfied and the matter is discharged.
The Discharge of Debt under Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy filing, a “discharge of debt” refers to when the bankruptcy court issues an order that relieves the debtor from having to pay off their creditors and prohibits the creditors from collecting on any debts owed to them. Though creditors are allowed to repossess property and enforce any liens attached to secured debts, they may not sue or badger a debtor over any debts that are discharged.
While this may sound like a relief, receiving a discharge order can impact a debtor’s credit report for up to 10 years. Also, not all debts are dischargeable and not every debtor may request to have their debt discharged. Only debtors who qualify and satisfy all court requirements will be eligible to have their debt discharged.
Some items that are not considered dischargeable debt include federal student loans, alimony, child support, criminal fines or restitution, property and business taxes that were due prior to the filing, court costs, and retirement plan loans. This is not an exhaustive list of the items that may not be discharged in a Chapter 7 bankruptcy filing. Thus, it may be wise to consult a local bankruptcy lawyer for more information regarding dischargeable debts.
Changes to Chapter 7 Bankruptcy Law
As a response to the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in March 2020. Although the primary purpose of this Act is to provide emergency assistance and healthcare to those affected by the pandemic, it also made some significant changes to the provisions of various federal bankruptcy laws.
Specifically, the CARES Act has amended the definition provided for “current monthly income” under Chapter 7 bankruptcy filings. The definition now permits individuals to exclude payments made to them pursuant to the CARES Act. In other words, if a debtor received payment due to a condition triggered in the CARES Act, they will not have to include the amount as part of their income.
This change is crucial when it comes to filing Chapter 7 bankruptcy because whatever amount they received as part of the CARES Act will not alter their means test calculation, which again, determines a debtor’s eligibility for filing for Chapter 7 bankruptcy. Thus, an amount connected to the CARES Act that could have potentially put a debtor over the threshold requirement for Chapter 7, will no longer have this effect and the debtor will still be eligible.
It is important for debtors to remain aware of changes to the U.S. Bankruptcy Code, such as the one just discussed, because they can have a serious impact on the outcome of a bankruptcy filing. Instead of continuously reviewing the laws and trying to make sense of all the legal jargon, it may be much more helpful to hire a lawyer whose job it is to keep debtors informed.
Chapter 7 bankruptcy lawyers not only need to stay abreast of new laws and amendments to the U.S. Bankruptcy Code, but they also can explain any changes made and increase the chances of filing a successful bankruptcy case.
Where Can You Find the Right Lawyer?
As discussed above, filing for bankruptcy is a serious matter that requires precise attention to detail. An individual will need to evaluate all of their income, expenses, property, and assets, as well as will have to follow a strict legal process. A person will also have to know any changes made to the law and how to apply them.
Therefore, if you are considering filing for Chapter 7 bankruptcy, then you should contact a local bankruptcy lawyer for further guidance immediately.
An experienced bankruptcy lawyer will already be familiar with the U.S. Bankruptcy Code, can discuss what Chapter of bankruptcy you may be eligible for, and can help you prepare and file for the appropriate Chapter of bankruptcy. Your lawyer can also answer any questions or concerns you have throughout the process, as well as will be able to represent you at any bankruptcy proceedings.