Thursday, March 3, 2011

An Overview of Chapter 7 Bankruptcy (presented by Nolo).

Learn how Chapter 7 bankruptcy works.

Chapter 7 bankruptcy is sometimes called “liquidation” bankruptcy — it cancels your debts but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors.

Chapter 7 bankruptcy refers to the chapter of the federal statutes (the Bankruptcy Code) that contains the bankruptcy law.

Bankruptcy Costs in Time and Money

The whole Chapter 7 bankruptcy process takes about four to six months, costs for filing and attorney fees are usually a fixed rate, and commonly requires only one trip to the courthouse.

Who Can File

Chapter 7 can be a powerful remedy for debt problems but it isn’t available to everyone. For example, you won’t be able to use Chapter 7 if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan.

Bankruptcy Forms

To file for bankruptcy, you fill out a two-page petition and a number of other forms. Then you file the petition and forms with the bankruptcy court in your area. Basically, the forms ask you to describe:

your property

your current income and its sources

your current monthly living expenses

your debts

property you claim the law allows you to keep through the bankruptcy process (called “exempt property”) — most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven’t spent, and other necessities such as a car and the tools of your trade.

property you owned and money you spent during the previous two years, and

property you sold or gave away during the previous two years.

You must also file a certificate showing that you have completed credit counseling with an agency approved by the United States Trustee. (For a list of approved agencies in each state, go to the Trustee’s website,www.usdoj.gov/ust, and click “Credit Counseling and Debtor Education.”)

If you’re facing an emergency, like a foreclosure or repossession in the next few days, you can file just the two-page petition, but you must file the rest of the forms within 15 days.

Bankruptcy’s Magic Wand — The Automatic Stay

Filing for bankruptcy puts into effect an “Order for Relief” — known informally as the “automatic stay.” The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab (“garnish”) your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits.

Bankruptcy Court’s Control Over Your Financial Affairs

By filing for bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. You can’t sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court’s consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.

The Bankruptcy Trustee

The court exercises its control through a court-appointed person called a “bankruptcy trustee.” The trustee’s primary duty is to see that your creditors are paid as much as possible on what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid.

The trustee (or the trustee’s staff) will examine your papers to make sure they are complete and to look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 cases, the trustee finds nothing of value to sell.

The Creditors Meeting

A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a “creditors meeting” has been scheduled.  The trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. The trustee will ask you whether the information in your papers is 100% true.  Creditors rarely attend this meeting, but if they do, they may question you under oath about where collateral is located or about information you gave them to obtain the loan.

This meeting, which takes place somewhere in the courthouse, rarely lasts more than a minute or two. In the vast majority of Chapter 7 bankruptcies, this is the debtor’s only visit to the courthouse.

What Happens to Your Property

If, after the creditors meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property — which means that you get to keep it, even though it is nonexempt.

What Is Exempt Property?

Each state has laws that determine which items of property are exempt in bankruptcy, and in what amounts. These items cannot be seized by creditors or by the bankruptcy trustee.

Many states exempt health aids, “personal effects” (things such as electric shavers, hair dryers, and toothbrushes), ordinary household furniture and clothing without regard to their value.

Other kinds of property are exempt up to a limit. For example, in many states, furniture or a car is exempt to several thousands of dollars. This exemption limit means that any equity in the property above the limit isn’t exempt. (Equity is the market value minus how much you still owe.)

Typically, the following items are exempt:

part of the equity in motor vehicles (the amount varies from state to state)

reasonably necessary clothing (no fur coats)

reasonably necessary household goods and furnishings

household appliances

jewelry, to a few hundred dollars

personal effects

life insurance (cash or loan value or proceeds), (the amount varies from state to state)

part of the equity in a residence (the amount varies from state to state)

pensions

public benefits

tools of a trade or profession, to a certain value, and

unpaid but earned wages.

As it turns out, any property owned by most Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt.

How Your Secured Debts Are Treated

If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you’re behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before — unless you have enough equity in the property to justify its sale by the trustee.

If a creditor has recorded a lien against your property without your consent (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in bankruptcy.

The Bankruptcy Discharge

At the end of the bankruptcy process, all of your debts are wiped out (discharged) by the court, except:

debts that automatically survive bankruptcy, unless the court rules otherwise (for example, child support, most tax debts, and student loans), and

debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).

After Bankruptcy

Once you receive your bankruptcy discharge, you no longer legally owe your creditors for any discharged debts. You can resume your economic life without court supervision, except you must tell the court if you receive (or become eligible to receive) an inheritance, insurance proceeds, or proceeds from a divorce settlement within 180 days of the date you originally filed your papers.

You can start rebuilding your credit, but it will take several years before you can get decent interest rates on a credit card, mortgage, or car loan. You can’t file for Chapter 7 bankruptcy again for another eight years from the date of your filing.

Copyright 2005 Nolo

 

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