- 1 What Is Chapter 7 Bankruptcy?
- 2 What Happens To Your Assets in a Chapter 7?
- 3 Should you file Chapter 7 Bankruptcy?
- 4 Not All Debts Are Dischargeable in Chapter 7 Bankruptcy
- 5 What are some of the disadvantages of Chapter 7?
What Is Chapter 7 Bankruptcy?
Most people have heard of Chapter 7 bankruptcy.
It’s the one where you typically wipe out all your debts.
Chapter 7 bankruptcy is known as:
- a liquidating bankruptcy (liquidation),
- personal bankruptcy or,
- just plain “bankruptcy.”
It is also referred to as a consumer bankruptcy, although businesses can also file under Chapter 7.
Eligibility to file Chapter 7 is determined by a couple of different tests: (See Details On The Bankruptcy Means Test)
- The “Means Test”: Necessary if your gross income received in the six (6) calendar months prior to filing your bankruptcy case exceeds the median income for your geographic area as determined by the US Census; and
- Current Budget Test: This is your current income minus necessary (but actual) living expenses.
See the US Courts’ Summary of Chapter 7 Bankruptcy Basics
What Happens To Your Assets in a Chapter 7?
An asset (property) is anything you own.
It is also something you have a right to in the future.
Assets can be tangible: House, Car, Cash, Clothes, bank account funds, furniture, etc.
Or Intangible: Right to sue someone, right to inherit something,
In Chapter 7 some, and in most cases all, of your assets will be exempt.
California law provides two separate sets of exemptions from which to choose.
Basically, you can exempt any items normally used for your support and maintenance, such as clothing, furniture, household goods, equity in your home, and so forth.
After you file your case, a Trustee is appointed. He (or she) will liquidate (sell) all of your non-exempt assets and pay your creditors according to the priority afforded to them by the Bankruptcy Code. More On Bankruptcy Exemptions
You may voluntarily repay any debt upon agreement with the creditor after completion of the Chapter 7 case. Whether this is ever advisable is questionable and is an issue to be discussed with your attorney or lawyer.
Should you file Chapter 7 Bankruptcy?
The goal of most any personal bankruptcy attorney is to obtain a discharge or “bankrupt” their client’s existing debts and to allow them a *fresh start* on their finances.
A discharge of debts means you no longer need to repay those debts that were incurred before you filed your bankruptcy.
Your creditors are entitled to share in the proceeds obtained from the liquidation of your non-exempt assets.
Not All Debts Are Dischargeable in Chapter 7 Bankruptcy
Certain debts are non-dischargeable in Chapter 7 and Chapter 13.
Some (but not all) examples of these are:
- alimony and child support obligations,
- taxes less than three (3) years old,
- student loans (with the sole exception listed below),
- any debts procured by fraud,
- incurring debt without a reasonably certain ability to repay the debt
Certain debts related to a divorce proceeding, such as attorneys fees, MAY be dischargeable in a Chapter 13, but not in a Chapter 7. See more on which debts are dischargeable.
The only way to determine which Chapter under which you should file, is to first compare your options under the other available Chapters (with the assistance of a bankruptcy attorney). Generally, Chapter 7 is the cheapest and quickest of the three major Chapters (the others being 11 and 13) of bankruptcy law.
Costs and fees vary depending on the number of creditors you have, complexity of your case, and other factors.
Chapter 7 usually allows you to discharge most or all of your debts.
It allows you to do this regardless of how many assets you have.
It basically allows you to walk away from your debts and start over.
Corporations do not receive discharges of debts, but there still may be some benefit to allowing a trustee to liquidate the assets.
What are some of the disadvantages of Chapter 7?
You are only able to receive a discharge after eight (8) years have passed since the commencement of the last case in which you received a discharge.
You can file another Chapter 13 case sooner (usually 4 years). Thus, you should not file a bankruptcy if you need the option of doing it again in the next eight years.
If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 petition. Only under extraordinary circumstances will the Trustee operate a business.
Recovery Of Preferential Payments
Payments made to or on behalf of any relatives within twelve (12) months prior to filing your bankruptcy case are recoverable by the Trustee in your case.
If you repaid money during that period to your brother, or made payments on a credit card that your mother let you use, they may have to pay back that money to the Bankruptcy Trustee.
The Trustee will then distribute it equally to all your creditors.
This is one of the biggest mistakes people make, often innocently, because they don’t know they will be filing a bankruptcy.
But that’s the law.
It’s designed to prevent debtors from preferring one creditor over another.
The same is true for non-relatives, although the lookback period for them (such as credit cards, etc.) is only ninety (90) days.
What about your credit after a Chapter 7 case?
The bankruptcy will appear on your credit report for up to ten (10) years after you file. Other negative marks on your credit must be removed after seven (7) years (like late payments on credit cards, foreclosures, etc).
However, according to my former clients, this is usually not as big a problem as most people think. Credit lending agencies know you won’t be able to file another Chapter 7 bankruptcy for at least 8 years, and therefore, they don’t have that risk to bear.
You will not get as high a credit limit as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn’t be that difficult and you can rebuild your credit over time.
What you will likely face is higher interest rates, required higher down payments, more points, etc.
See my article on credit scores after bankruptcy for more information.
A word about credit cards and cash advances
Any debt aggregating more than $550.00 from any single creditor for non-essential,”luxury” goods, or cash advances totaling over $825.00 on a credit card, incurred or taken within 90 days prior to filing the bankruptcy, are presumed to be nondischargeable.
The obvious reason for this is to discourage would-be debtors from “running up” their credit charges, then filing bankruptcy.
To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it’s best not to use them at all).
It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy.
You should consult with your attorney about your personal situation.
This particular provision is just a presumption of nondischargeability. It does not mean that if you wait more than 90 days you are magically free from nondischargeability issues.
Nor does it mean that if you file the bankruptcy within the 90 days that you won’t be able to discharge that debt.