Chapter 7 is the smallest, easiest and least expensive type and has the following general characteristics:
The total pendency (or duration) of an uncontested Chapter 7 Bankruptcy case is about 5 or 6 months (which in legal terms is very fast). The Bankruptcy Court’s filing fees are $299.00
A Chapter 7 Bankruptcy will discharge all debts that can be discharged almost immediately (the official discharge of creditors will not occur until the end of the case, but due to the immediate “stay” that takes effect upon the filing of the petition, the effect to the client is, for the most part, that their debts are no longer an issue i.e., phone calls from creditors will cease, lawsuits, levies, garnishments, etc., all will stop). However, please note the following:
All secured creditors (mortgages, car payments, lease or rent obligations) must be current if you want to keep the house, car, or stay in the premises.
Some debts are not dischargeable i.e., spousal or child support arrears, some taxes, loans for tuitions, etc.
Most credit card accounts will likely be closed, even if you are current with the payments and even if you have a zero balance. If you want to keep a credit card that has a zero balance, the best thing to do is to call the issuing card company and explain that you are going to file a Bankruptcy petition due to circumstances, but that you would like to keep that account. There is no law that compels a credit issuing entity to keep the account open or to close it but most credit issuing companies have a policy of simply closing the account. However, in some cases, a credit card account may survive the Bankruptcy.
For the most part, after filing a Chapter 7 Bankruptcy, a cash and carry policy must usually be adopted while improving the financial situation and then re-establish credit gradually. Improving credit scores can easily be done but usually takes 2 – 3 years.
However, under the 2005 changes to the Bankruptcy Code, a debtor must now qualify for a Chapter 7. Basically, the way one qualifies for a Chapter 7 is by NOT having too much income as determined by a “Means Test”.
How much is too much, depends on the number of people, (whether they are close family members or not), anyone living in your house that you support. In some cases even if a person does not live in your house, i.e., aging or infirm parents, etc., can be considered supported for means test purposes.
A Debtor’s income is based on their actual income for the past six months prior to the filing of the petition. It is then annualized for “Means Test” purposes, (in other words, actual income received for the past six months… times two). An example of how this works is as follows:
California debtors, husband and wife have 2 kids. The Means Maximum is approximately $80,000. Husband has regular full time income of $50,000. Wife is a school teacher that makes an annual income of $60,000 for a combined annual total income of $110,000. However, Wife does not have income for the summer months that school is out. Debtors file their petition in November and Wife has only had income for three of the last six months totaling $20,000. Husband’s income was steady for the last 6 months for a total of $25,000. The actual income received by the two together total $45,000. When annualized (times two) the total actual income for means test purposes is $90,000. Qualifying the debtors at $90,000 (only $10,000 above the means threshold) is a lot easier than trying to qualify them at $110,000 ($30,000 above the limit).
The “Means Test” income thresholds vary depending on the number of persons you support in your household. These threshold maximums are based on IRS national standards and may be exceeded by substantial amounts for Debtors living in California because the Bankruptcy Court recognizes that some states are more expensive to live in than others, (i.e., state income tax rates, and costs of living), California being among the most expensive.
If a debtor cannot qualify for a Chapter 7 under the means test, a petition under Chapter 13 will be the only means by which to seek protection from creditors and the debtor will be forced into a 5 year Chapter 13 plan.
Furthermore, the “Means Test” income threshold is only the first of three elements necessary to qualify for a Chapter 7 Bankruptcy. The other two include:
Asset Values. If you have too many assets in categories that are not exempt, or if asset values exceed exemption limits, you may not qualify for a Chapter 7 discharge without the risk of losing those assets. For example; even though a Debtor may have limited income and qualifies under the “Means Test”, if that Debtor has excessive equity in a home (over the homestead exemption amounts that range from $75 – 150K, depending on marital status, age, disability, etc.,), or other property of net value (equity), or un-exempt savings accounts, bonds, etc., the Bankruptcy Court may determine that the Debtor is not insolvent and therefore does not qualify for a Bankruptcy under Chapter 7 and must instead file a petition under Chapter 13 or 11. The monthly payments under a Chapter 13 would have to exceed the amount that creditors would receive if the assets were sold and the money paid to creditors.
For example: debtor has severely diminished income due to a business failure but has $225K in equity in his home. After exempting $100,000 under the homestead exemption, there is $125,000 available to creditors. In order to keep the home under a 5 year Chapter 13 plan the debtor would have to pay about $2,083.00 plus about $230 (Trustee’s administrative costs) per month to the Bankruptcy Trustee. Keep in mind that the monthly amount paid to the Trustee is in addition to the debtor’s then existing mortgage and regular monthly expenses.
Excess Disposable Income. Even if a Debtor has no assets, and qualifies under the “Means Test”, when a Debtor completes an income and expense sheet (expenses do not include credit card and any other dischargeable debts), if, after deducting ordinary expenses, rent or mortgage, utilities, groceries, out of pocket health care costs, fuel and auto maintenance expenses, etc., there remains too much money left over (referred to as disposable income), the Bankruptcy Court may determine that the Debtor is capable of servicing debts under Chapter 13 for the amount of that disposable income for a period of three years or until debt obligations are fulfilled, whichever comes first.
For example: a client has $30K of credit card debt; $20K in medical bills; a repossession of her car and a bill for $10K on that repo for a total debt of $60,000. She has a job earning $20 per hour and has moved back to her parents’ home. She pays no rent and only helps with groceries. After deducting her expenses including car maintenance, gas, and insurance, groceries, and other expenses, but NOT including her credit cards, medical bills, and the repo bill, she has disposable income of over $1,200 per month. She will probably not qualify for a Chapter 7 Bankruptcy. Her options are to file a petition under Chapter 13 and make payments for 36 months at $1200 (for a total of $43,200). After making those payments for three years, the balance of unpaid debt will be discharged. Or, she could move out of her parents’ house, rent an apartment for $1,200 a month, and then file the Chapter 7 petition. Her income and expense sheet will then show less than $100 of disposable income and she will qualify for the Chapter 7, all her debts will be discharged without making any payments to creditors, and when the case closes 5 months later, she can move back in with her parents and begin to save money and get back on her feet.
1. With respect to car payments, if you want to keep a car or cars that you are currently making payments on, you must reaffirm that contract. A reaffirmation tells the Bankruptcy Court and the creditor that you intend to retain the car and keep making the payments until the end of the lease period or until the finance contract is complete.
2. There are three things you have to pay for in a Chapter 7 Bankruptcy. They are 1. Your attorney fees 2. The Bankruptcy Court’s filing fees and 3. Mandatory credit counseling courses. Except for the credit counseling courses, all fees must be paid in full before the actual filing of the petition with the court. The reason for this is because in a Chapter 7 Bankruptcy, all dischargeable pre-petition debts must be discharged. Therefore if you owed your attorney money after the petition is filed, that debt would also be discharged. However, payment arrangements can be made prior to the filing of the petition.
3. Mandatory Credit Counseling Courses are required in all Chapters of Bankruptcy. There are two credit counseling courses that must be completed. The first, called a Pre-Petition Credit Counseling Course, needs to be completed and a certificate of completion submitted with the petition of Bankruptcy. The second is called a Post-Petition (sometimes called a Pre-Discharge) Financial Management Course should be completed within 45 days after the Petition is filed with the Bankruptcy Court.
There are 3 ways you can take this course.
On Line – Least expensive and can be completed in about an hour.
By telephone – A little more in cost and takes about 45 minutes.
Classroom setting – Costs the most and is offered during the week and weekends from some credit counseling providers.
After the petition is filed with the Bankruptcy Court under Chapter 7, there are only two things left for the debtor to do. They are:
Complete the 2nd Credit Counseling Course (called the “Post-Petition Financial Management Course” or sometimes called “Pre-Discharge Financial Management Course”), and
Attend a hearing, called a 341 Creditors Meeting. At this hearing the debtors will be called to testify before the “Panel Trustee”. There are about 8 to 10 or 12 “Panel Trustees” that serve under the supervision of the U.S. Trustee for the Jurisdiction the debtor files in. These Panel Trustees make preliminary findings about the nature of the debtor’s financial circumstances. The Trustee will “swear in” the debtor and ask the debtor to produce identification and their social security card. Each Trustee has their own little script of questions they routinely ask the debtor, who gives his or her answers under penalty of perjury. The questions usually concern whether the debtor has filed a bankruptcy before, whether the debtor is obligated to pay any kind of support (child support or spousal support), and if the contents of their most recent tax returns are true and correct. But some questions are asked by all the Trustees in every case. They include:
– Did you read your petition before you signed it, and
– Is everything in the petition true and correct to your knowledge.
That is about it. The questions usually take only about 3 or 4 minutes. The worst part about this hearing is just going there, finding a parking space, and then waiting your turn because you will there with about 20 or 30 other people on that hour’s calendar. After that, it’s all pretty much over. There is really nothing else to do. About 3 or 4 months later you will get a letter from the Bankruptcy Court telling you that the case is closed and the debts are discharged.
Attorney Thomas E. Brownfield is a Southern California Bankruptcy Attorney assisting clients in Orange, Los Angeles, Riverside and San Bernardino Counties. He uncovers some of the greatest myths that hunt people regarding bankruptcy and shows you how filing bankruptcy doesn’t mean losing everything but instead means gaining something more…
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