Chapter 7 Bankruptcy
This page answers many of the most common questions people have about Chapter 7 bankruptcy and describes the Chapter 7 bankruptcy process at Kidwell Law Office.
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What is Chapter 7 Bankruptcy?
Chapter 7 is the most common type of bankruptcy filed by individuals. It is often referred to as a “liquidation” bankruptcy because any non-exempt assets owned by debtors who file Chapter 7 are sold (or “liquidated”) by the bankruptcy trustee and the proceeds distributed to pay the claims of creditors. In reality, in more than 90% of Chapter 7 cases debtors do not surrender any assets and receive a discharge of debts with no loss of any assets. For this reason Chapter 7 is sometimes referred to as a “fresh start” bankruptcy.
Why Should I File Chapter 7 Bankruptcy?
Filing Chapter 7 bankruptcy will immediately stop all creditor collection efforts, including threatening letters, phone calls, and lawsuits. And, with the exception of child support, it will stop any attempts at wage garnishment. Chapter 7 bankruptcy can even stop a pending home foreclosure, eviction proceeding, or car repossession.
If you are suffering financial hardship, whether through illness, loss of income, death of a family member, or divorce, and your level of debt has become unmanageable, bankruptcy can help you gain control over your finances and give you a fresh start.
There are many factors to consider when deciding if Chapter 7 bankruptcy is right for you and your circumstances.
If you are struggling with overwhelming debt, set up a free, no obligation consultation with me to discuss the advantages and disadvantages of filing Chapter 7
What Does It Cost to File Chapter 7 Bankruptcy?
I generally charge a flat fee of $2,000 to represent clients filing Chapter 7 bankruptcy. However, total attorney fees will depend on the complexity of your case.
Additional costs, including the court filing fee and charges for mandatory credit counseling, will generally total about $375.
Do I Qualify for Chapter 7 Bankruptcy Relief? What Is the Means Test?
Not everyone can file Chapter 7 bankruptcy. To qualify for Chapter 7 bankruptcy, there are a couple requirements you will have to meet:
- Timing: You are not eligible for a discharge in a Chapter 7 case if you received a discharge in a prior Chapter 7 or Chapter 11 case filed within the preceding eight years, or received a discharge in a prior Chapter 13 case filed within the preceding six years.
- The Means Test: If you are an individual debtor with primarily consumer (personal, family and household) debt you will need to pass the means test to be eligible for Chapter 7; individuals with primarily business debt, such as personal guarantees on debts owed by a company, are not required to pass the means test. The first step of the means test asks if your current monthly income (measured over the six months before you file bankruptcy) is more or less than the median income in your state for a household of your size; if it is less than the median, you pass the means test and can file for Chapter 7. If it is more than the median you may still be eligible for Chapter 7, but only if calculations based on your income and your actual allowed expenses show that you have too little remaining (disposable) income to fund a Chapter 13 plan.
What Debts Can Be Eliminated (Discharged) in Chapter 7 Bankruptcy?
Bankruptcy law determines what kinds of debt can and can’t be eliminated (the technical term is “discharged”).
Bankruptcy is particularly effective in eliminating or discharging personal liability on unsecured debts (in other words, debt that is not backed or “secured” by an asset or collateral).
Common debts that can be eliminated (discharged) in Chapter 7 bankruptcy include:
- Credit card debt (with important exceptions, listed below)
- Loans – all types
- Trade/business payables
- Medical bills
- Deficiencies owed after seizure and sale of collateral on secured loans
- Utilities (Disclaimer- Section 366 of the Bankruptcy Code requires debtor to pay a deposit for continued usage)
- Joint debts (Disclaimer- debtor liability goes away but non-filing co-debtor liability remains)
What Debts Cannot Be Eliminated (Discharged) in Chapter 7 Bankruptcy?
Common debts that cannot be eliminated (discharged) in Chapter 7 bankruptcy include:
- Debt incurred through fraud
- Certain credit card debt and cash advances incurred in the 90 days prior to filing bankruptcy
- Child support
- Sales, property, and withholding taxes
- Most student loans (there are exceptions)
- Income taxes that are less than 3 years old or that do not meet other discharge requirements
- Debts resulting from many crimes (including drunk driving accidents)
- Divorce property settlements
Will I Lose My Home, Car or Other Assets If I File Chapter 7 Bankruptcy?
Approximately 95% of all bankruptcy filings are “no asset” cases and nothing needs to be paid or surrendered to the bankruptcy trustee because all of the property the debtor owns is protected as “exempt.” With the option to select exemption schemes under either the Bankruptcy Code or Minnesota law, debtors in Minnesota can most often keep all of their property in a Chapter 7 case.
After filing bankruptcy you can expect to keep property that is subject to security interests (like home mortgages and automobile liens) provided that you continue to make the mortgage or car payment.
The Chapter 7 Bankruptcy Process: Seven Steps to a Fresh Start
STEP 1: YOUR FREE INITIAL CONSULTATION
I provide a free and confidential initial consultation by phone, via Zoom or Skype, or in person to anyone looking for legal representation in the filing of a bankruptcy petition.
The purpose of this meeting is for us to analyze your financial affairs together so that I can determine whether bankruptcy or some other non-bankruptcy option is the best solution for your situation.
I will ask you a lot of questions during this meeting to identify any legal issues that might affect a bankruptcy filing and, if bankruptcy is an option for you, to begin to determine how best to protect your assets and property.
To prepare for your initial consultation, I will need you to fill out a few forms that provide information about your income history, total indebtedness, and total assets.
Remember, there is absolutely no charge for this free consultation and you will not need to make any commitment or decision to have me represent you at this time unless you feel comfortable doing so.
STEP 2: YOU PROVIDE US WITH INFORMATION & COMPLETE CREDIT COUNSELING
If you decide to have me represent you for your Chapter 7 bankruptcy, I will need you to provide me with copies of bills, copies of tax returns, pay stubs, and other information necessary to get your Chapter 7 bankruptcy case filed.
Federal bankruptcy law requires that you provide the following information to me before I file your Chapter 7 bankruptcy:
- 7 months pay stubs, or 6 months income records if self-employed
- Complete copies of your Federal and State income tax returns
- Documentation of your household income, expenses, property and other assets
- List of debts.
- Signed attorney fee agreement
- Pre-Bankruptcy Credit Counseling Certificate: This certificate is obtained by taking a credit counseling course from a Justice Department-approved credit counseling agency. This course takes about one hour to complete and can be done by telephone or by internet. We will provide you with detailed information on how to complete it.
While this is a lot of information to gather together, Kidwell Law Office makes this process easy. As our client, we will provide you with a link to a secure website where you can easily fill out forms online and upload all the bankruptcy related documents needed for your case and provide you with the information you need to complete your pre-bankruptcy credit counseling course.
STEP 3: WE REVIEW & SIGN BANKRUPTCY PAPERWORK
After we receive your documents and forms, we will schedule you for a meeting to review and sign your Bankruptcy Petition, Schedules, and Statement of Financial Affairs which will be filed with the court.
Typically, this meeting takes approximately one hour to complete.
STEP 4: WE FILE YOUR CASE WITH THE COURT
When all your paperwork is reviewed and signed, we file your bankruptcy documents with the Court by electronic filing over the internet.
Once the Court receives your bankruptcy petition this immediately results in an “automatic stay” that stops, without any further action or order:
- foreclosure or eviction proceedings,
- car repossession,
- wage garnishment, and
- harassing phone calls and letters from debt collectors.
If your creditors willfully violate the automatic stay they can be held liable for any actual damages caused, including costs and attorneys’ fees, and in some cases may be held liable for punitive damages.
STEP 5: WE ATTEND THE MEETING OF CREDITORS (341 HEARING)
About 30 days after we file your bankruptcy case, we will attend the Meeting of Creditors or 341 Hearing together. If you and your spouse are filing jointly, you both must appear at the meeting of creditors.
You (and your spouse, if filing jointly) will be required to bring the following to your Meeting of Creditors (341 Hearing):
- Photo ID
- Social Security card
- Most recent pay stub
This meeting permits the United States Trustee (or their representative) to review your petition and schedules and question you under oath regarding your assets, liabilities, and other matters that pertain to your bankruptcy case. In addition, the trustee (or representative) will ask questions to ensure that you understand the bankruptcy process.
Creditors are also invited to ask you questions about your assets or other matters pertaining to your case. In most cases, however, creditors do not attend the 341 Hearing.
We’ll meet about 15 minutes before the Meeting of Creditors starts to go over the questions you may be asked. The actual meeting usually lasts no more than 5-10 minutes, and we’ll be right by your side.
Hiring an experienced bankruptcy lawyer to represent you is the best way to ensure that your 341 Hearing – and the entire bankruptcy process – goes smoothly.
STEP 6: YOU COMPLETE PRE-DISCHARGE DEBTOR EDUCATION COURSE
After filing your case and before your discharge can be approved, you must complete a debtor education financial management course from a Justice Department-approved credit counseling agency. This course takes about one hour to complete and can be done by telephone or by internet. We will provide you with detailed information on how to complete it.
STEP 7: YOUR DEBTS ARE DISCHARGED!
After successfully completing the above steps, you will receive your Chapter 7 bankruptcy discharge from the bankruptcy court about 90 days after you filed your case.
A bankruptcy discharge releases you from all liability for your debts and forbids creditors from contacting you in any way regarding those debts at any time in the future.
The Kidwell Law Office website has a page (Life After Bankruptcy) with a number of excellent articles explaining what you can expect after your bankruptcy discharge. These articles provide money management strategies and tips on how you can repair your credit to maximize your success after bankruptcy.
What Are the Tax Consequences for Filing Chapter 7 Bankruptcy?
For the average individual consumer, filing Chapter 7 bankruptcy and discharging debts will not increase your taxes. Section 108 of the Internal Revenue Code states that when a debt is discharged in bankruptcy, the discharge doesn’t result in any additional income tax.
If you are struggling with unmanageable debt and considering bankruptcy, schedule a free, no commitment consultation with Kidwell Law Office today by clicking on the Contact Us button below.