CHAPTER 7 BANKRUPTCY
Bankruptcy law has been in an unsettled state for serval years due to proposed reforms.
Bankruptcy law was significantly changed with the passage of the Bankruptcy Reform Act of 2005. This law became effective in April of 2005 and further effective in October of 2005. There are now income requirements for filing as well as two separate educational components to bankruptcy, including credit counseling and financial management education. Persons contemplating filing bankruptcy must receive credit counseling within 180 days of filing and they must have a certificate from the approved credit counseling agency before filing. After filing and prior to discharge, debtors under the Bankruptcy Act must receive financial management education and they must have a certificated from an approved financial management course prior to receiving a discharge in bankruptcy. Prior to the new law, a married person filing an individual chapter 7 bankruptcy did not have to disclose his spouse's income; one of the major changes in the law requires an examination of household income. The spouse's income must be disclosed and considered in the determination of whether the debtor can afford to pay his/her debts. This can put significant strain on a marriage.
Bankruptcy law is complicated, so a question and answer explanation follows. Please consult an attorney to explain how bankruptcy will apply to your situation. The explanation is designed to be general in nature, and your situation may be different. Chapter 7 bankruptcy may not be the proper step in your situation. This is not intended to provide legal advice for your specific situation.
WHAT YOU SHOULD KNOW ABOUT CHAPTER 7 BANKRUPTCY
**Please note that there are substantial differences between Chapter 7 and Chapter 13 bankruptcy cases. Please review our page on Chapter 13 bankruptcy.
Why should I consult Perry Law Group, PC when so many lawyers advertise low bankruptcy fees?
We believe in giving personal service and attention to our clients for fair and competitive fees. A few lawyers quote low fees but don't advertise the total cost with the required court filing fees included (up to $299.00 as of August 29, 2006). In the end, you may not receive the bargain price you expected. Others will quote a basic low fee but bill you for additional fees later because you have "so many creditors", or bill to prepare a simple homestead deed to protect your assets, or bill you for a variety of other extra fees and costs you don't anticipate in the beginning. We quote a fair and competitive fee up front, and advise you of your total costs. Also, some bankruptcy attorneys only advertise and file Chapter 7 cases. We handle Chapter 13 cases too, so you will be sure that we have no incentive to steer you into Chapter 7 if Chapter 13 works better for you. With us, you will receive personal attention from an attorney. The high volume, low cost offices may all but eliminate your contact with an attorney and have you talk with a paralegal or other support staff during the interview process. We belong to the National Association of Consumer Bankruptcy Attorneys, and have advanced bankruptcy software with electronic filing.
What is chapter 7 Bankruptcy and how does it work?
Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is that part of the federal law that deals with bankruptcy. A person who files bankruptcy under chapter 7 is called a debtor. In a chapter 7 case, the debtor must turn over to a trustee his or her nonexempt property, if any exists. [See the next question and answer.] The trustee then converts the nonexempt property to cash to pay creditors. In return, the debtor receives a chapter 7 discharge, provided he or she pays the filing fee, is eligible for such a discharge, and obeys the orders and rules of the court.
What is nonexempt property?
Some property (or types of property) may be kept by the debtor through the bankruptcy, while other nonexempt property must be turned over to the trustee. Property that may be kept by the debtor through the bankruptcy is exempt. Property that must be transferred to the trustee to pay debts is nonexempt. Each state allows debtors different exemptions. You should discuss those exemptions with your attorney.
What are homestead exemptions?
In Virginia a homestead exemption is a property exemption available to any Virginia resident. However, the exempted amount may only be used once in a lifetime by an individual. Thus, if you claimed a full $5,000.00 homestead exemption previously, you have already used your homestead exemption and it is no longer available to you. If timely and properly claimed, exempt property for Virginia debtors includes a homestead exemption that allows up to $5,000.00 in specified real or personal property to be held by the debtor exempt from the reach of both general creditors and the bankruptcy trustee. For persons with dependents, an additional $500.00 per dependent is added to the homestead exemption amount. Some disabled veterans are entitled to an additional homestead exemption. The homestead exemption does not apply to the purchase price of the property, to child or spousal support obligations, or to shield property from money you owe for intentional torts.
What other property may be exempt in Virginia?
Other exempt property includes wedding and engagement rings, cemetery plots and preneed burial contracts not exceeding $5,000.00, household furnishings up to $5,000.00 in value, motor vehicles to $2,000.00 in value, clothing valued to $1,000.00, and tools necessary for a trade or occupation, including motor vehicles, not to exceed $10,000.00 in value. Other exemptions are available, but those listed are among the most common exemptions claimed. Many debtors go through bankruptcy without having to turn any property over to the trustee.
What is a chapter 7 discharge?
It is a court order releasing a debtor from all his or her dischargeable debts and ordering the creditors not to attempt to collect those debts from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. Some debts, however, are not dischargeable under chapter 7 (see below), and some persons are not eligible for a chapter 7 discharge.
What is means testing?
Means testing is a method of determining a person's eligibility to maintain a chapter 7 case. Under means testing a person whose current monthly income from all sources multiplied by 12 exceeds the median annual income, as reported by the U.S. Census Bureau, for the person's state and family size, must show that he or she is not able to pay a minimum of $100 per month for 60 monthsto his or her unsecured creditors from his or her disposable monthly income in order to be elibible to maintain a chapter 7 case. Disposable monthly income is a person's current monthly income froma ll sources less the person's permitted current monthly expenses. The chapter 7 case of a person whoe disposable monthly income is such that he or she is deemed able to pay $100 per month or more to unsecured creditors for 60 months will be dismissed or converted to chapter 13 unless special circumstances exist.
How is means testing carried out?
Every person filing must file a Statement of Current Monthly Income and Means Test Calculation. This document sh0ows the person's current monthly income and expenses that a person is allowed to claim. The person may also be questioned about his or her income and expenses at the meeting of creditors. From these figures the disposable income is calculated. The disposable income determines the payment a person can afford to make to his or her creditors. As your attorneys, we will analyze your income and expenses and tell you if there is a problem or potential problem in filing chapter 7. We have a computer program just for this purpose. Our goal is to avoid dismissal by the court for violating the means test. Most of the clients for whom we file chapter 7 bankruptcy have income well below the Virginia median income level for the size of their families.
What is a presumption of abuse and how does it affect the case?
When a chpater 7 case is filed by an ineligible person, under bankruptcy terminology that person is said to have abused the Bankruptcy system. When a person whose currentmonthly disposable income is such that he or she can afford to make monthly payments to unsecured creditors in the reuqired amount, a persumption of abuse is said to arise in the case. If a presumptionn of abuse arises in a case, the case will be dismissed or converted to chapter 13 unless the person filing the case can prove the existence of special circumstances, such as a serious medical condition.
What debts are not dischargeable under chapter 7?
All debts of any kind or amount, including out-of-state debts, are dischargeable under chapter 7 except the debts listed below. The following is a list of the most common debts that are not dischargeable under chapter 7.
Most tax debts and debts that were incurred to pay federal tax debts.
Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement, if the creditor files a complaint in the case (included here are debts for luxury goods or services and debts for cash advances made within 60 days before the case is filed).
Debts not listed on the debtors chapter 7 forms, unless the creditor knew of the case in time to file a claim.
Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the case.
Debts for alimony, maintenance, or support and, if the creditor files a complaint in the case, certain other divorce-related debts including property settlement debts.
Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the case.
Debts for certain fines or penalties.
Debts for educational benefits and student loans.
Debts for personal injury or death caused by the debtor's operation of a motor vehicle while intoxicated.
Debts that were or could have been listed in a previous bankruptcy case of the debtor in which the debtor did not receive a discharge.
What persons are not eligible for a chapter 7 discharge?
The following persons are not eligible for a chapter 7 discharge:
(1)A person who has been granted a discharge in a chapter 7 case filed within the last 8 years.
(2)A person who had been granted a discharge in a chapter 13 case filed within the last 6 years, unless 70 percent or more of the unsecured claims were paid off in the chapter 13 case.
(3)A person who files a waiver of discharge that is approved by the court in the chapter 7 case.
(4)A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the trustee in the chapter 7 case.
(5)A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.
(6) A person who makes false statements or claims in the chapter 7 case, or who withholds recorded information from the trustee. Such persons also may be subjected to prosecution for bankruptcy fraud.
(7)A person who fails to satisfactorily explain any loss or deficiency of his or her assets.
(8) A person who refuses to answer questions or obey orders of the Bankruptcy court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he or she is associated.
(9) A person who, after filing the case, fails to complete an insructioal course on personal financial management.
(10) A person who has been convicted of Bankruptcy Fraud or who owes a debt arising from a securities law violation.
What persons are eligible to file under chapter 7?
Any person who resides in, does business in, or has property in the United States may file under chapter 7, except a person who has been involved in another bankruptcy case that was dismissed within the last 180 days on certain grounds.
What persons should not file under chapter 7?
Someone with substantial equity in real estate (more than the homestead exemptions of $5,000 for one person or $10,000 for a husband and wife) should not file Chapter 7, but may be better off seeking Chapter 13 bankruptcy relief. A person who is not eligible for a chapter 7 discharge should not file under chapter 7. Also, a person who has substantial debts that are not dischargeable under chapter 7 should not file under chapter 7. In addition, it may not be wise for a person with current income sufficient to repay a substantial portion of his or her debts within a reasonable period to file under chapter 7, because the court may dismiss the case as constituting an abuse of chapter 7. Although it is not a legal requirement, some experts say that a chapter 7 case should not be filed unless a person's dischargeable debts exceed the value of his or her nonexempt assets by at least two thousand dollars.
Is there anything that a person must do before a chapter 7 case can be filed?
Yes. A person is not permitted to file a chapter 7 case unless he or she has, during the 180-day period prior to filing, received from an approved nonprofit budget and credit counseling agency an individual or group briefing (credit counseling) that may be conducted by telephone or on the internet, if desired, and must be paid for by the person. When the chapter 7 case is filed, a certificate fromt he agency describing the services provided to the person must be filed with the court. A copy of any debt repayment plan prepared for the person by the agency must also be filed with the court. In emergency situations, the requried credit counseling may be conducted after the case is filed.
How much is the chapter 7 filing fee and when must it be paid?
The filing fee is currently $299 for Chapter 7 filings. The filing fee is payable when the case is filed. However, if the person filing can show that his or her income is less than 150 per cent of the official poverty line and that he or she is unable to pay the filing fee, the court can waive payment of the filing fee. If the debtor is unable to pay the entire filing fee when the case is filed, it is possible to pay it in up to four installments, with the final installment due within 120 days. The period for payment may later be extended to 180 days by the court, if there is a valid reason for doing so. The entire filing fee must ultimately be paid, however, or the case will be dismissed and the debtor will not receive a discharge. The fee charged by the debtor's attorney for handling the chapter 7 case is in addition to the court filing fee.
Where is a chapter 7 case filed?
In the office of the clerk of the bankruptcy court in the district where the debtor has resided or maintained a principal place of business for the greatest portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States district court.
May a husband and wife file jointly under chapter 7?
Yes. A husband and wife may file a joint petition under chapter 7. If a joint petition is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. Both the husband and the wife must receive the required credit counseling before the case is filed and both must complete the reuried financial management course after the case is filed.
Under what conditions should both spouses file under chapter 7?
Both husband and wife should file if one or more substantial dischargeable debts are owed by both spouses. If both spouses are liable for substantial debt and only one spouse files under chapter 7, the creditor may later attempt to collect the debt from the non-filing spouse, even if he or she has no income or assets. In community property states it may not be necessary for both spouses to file if all substantial dischargeable debts are community debts. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.
When should a chapter 7 case be filed?
The answer depends on the status of the debtor's dischargeable debts, the nature and status of the debtor's nonexempt assets, and the actions taken or threatened to be taken by the debtor's creditors. The following rules should be followed:
Don't file under chapter 7 until all anticipated debts have been incurred, because it will be another six years before the debtor is again eligible for a chapter 7 discharge. For example, a debtor who has incurred substantial medical expenses should not file under chapter 7 until the illness or injury has either been cured or covered by insurance, as it will do little good to discharge, say, $50,000 of medical debts now and then incur another $50,000 in medical debts in the next few months.
Don't file under chapter 7 until the debtor has received all nonexempt assets to which he or she may be entitled. If the debtor is entitled to receive an income tax refund or a similar nonexempt asset in the near future, he or she should not file under chapter 7 until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will become property of the trustee.
Don't file under chapter 7 if the debtor expects to acquire property through inheritance, life insurance or divorce in the next 180 days, because the property will have to be turned over to the trustee unless it is exempt.
If hostile creditor action threatens a debtor's exempt assets or future income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a chapter 7 case . If a creditor has threatened to attach or garnish the debtor's wages or if a foreclosure action has been instituted against the debtor's residence, it may be necessary to file bankruptcy immediately in order to protect the debtor's interest in the property.
How does the filing of a chapter 7 case affect collection and other legal proceedings that have been filed against the debtor in other courts?
The filing of a chapter 7 case automatically stays (or stops) virtually all collection and other legal proceedings pending against the debtor. A few days after a chapter 7 case is filed, the court mails a notice to all creditors ordering them to refrain from any further action against the debtor. If necessary, this notice may be served earlier by the debtor or the debtor's attorney. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable to the debtor in damages. Criminal proceedings and actions to collect alimony, maintenance, or support from exempt property or property acquired by the debtor after the chapter 7 was filed are not affected by the automatic stay. The automatic stay also does not protect cosigners and guarantors of the debtor, and a creditor may continue to collect debts of the debtor from those persons after the debtor files a chapter 7 case.
May a person file under chapter 7 if his or her debts are being administered by a financial counselor?
Yes. A financial counselor has no legal right to prevent anyone from filing under chapter 7. But remember that if you can afford to pay at least $100 per month to your unsecured creditors, you may have to do so.
How does filing under chapter 7 affect a person's credit rating?
It will usually worsen it, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under chapter 7, apparently because it will be at least six years before they can again file under chapter 7. If there are compelling reasons for filing under chapter 7 that are not within the debtor's control (such as an illness or an injury), some credit rating agencies may take that into account in rating the debtor's credit after filing.
Are the names of persons who file under chapter 7 published?
When a chapter 7 case is filed, it becomes a public record and the name of the debtors may be published by some credit reporting agencies. However, newspapers do not usually report or publish the names of consumers who file under chapter 7. Business bankruptcy filings are usually published, however.
Are employers notified of chapter 7 cases?
Employers are not usually notified when a chapter 7 case is filed. However, the trustee in a chapter 7 case may contact an employer seeking information as to the status of the debtor's wages or salary at the time the case was filed. If there are compelling reasons for not informing an employer in a particular case, the trustee should be so informed. He or she may be willing to make other arrangements to obtain the necessary information.
Does a person lose any legal or civil rights by filing under chapter 7?
No. Filing under chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
May employers or governmental agencies discriminate against persons who file under chapter 7?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under chapter 7. It is also illegal for local, state, or federal government units to discriminate against a person as to the granting of licenses (including driver's license), permits, student loans, and similar grants because that person has filed under chapter 7.
Does a person lose all of his or her property by filing under chapter 7?
Usually not. Certain property is exempt and cannot be taken by creditors (unless it is secured by a valid mortgage or lien and the debt is overdue). A debtor is usually allowed to retain his or her unencumbered exempt property in a chapter 7 case. A debtor may also be allowed to retain certain encumbered (or secured) exempt property. The debtor's non-exempt property will be administered by the Trustee for payment of the debts, unless the property is of inconsequential value and therefore burdensome to the estate.
What encumbered property may a person retain in a chapter 7 case?
A person may retain certain encumbered property by reaffirming the underlying debt, or by paying the creditor the fair market value of the property securing the debt. If the lien held by the creditor is against property otherwise exempt from creditors and the lien was not inccured to finance the purchase or acquisition of the property, then the lien may be avoided in bankruptcy by filing a lawsuit in the Bankruptcy court agaisnt the creditor. This avoidance action is not generally included in the base fee for bankruptcy and will cost more in attorney's fees and costs.
Must a debtor appear in court in a chapter 7 case?
A Chapter 7 debtor does not normally appear in court (in the Richmond Virginia district) unless something unusual arises. Instead, there is a mandatory hearing called a “meeting of creditors” or "341 meeting" that is held in a room designated for hearings by the U. S. Trustee. This hearing usually takes place about a month after the case is filed. At this hearing the debtor is put under oath and questioned about his or her debts and assets by the trustee. In most chapter 7 consumer cases no creditors appear in court; but any creditor that does appear is usually allowed to question the debtor. If the bankruptcy court decides not to grant the debtor a discharge or if the debtor wishes to reaffirm a debt and is not represented by an attorney, there will be another hearing about three months later which the debtor will have to attend. The trustee is an attorney, not a judge. It is illegal to make false statements on any bankruptcy filing, or to the trustee, and a false statement may result in prosecution, imprisonment, and denial of bankruptcy relief.
What happens after the meeting of creditors?
After the meeting of creditors, the trustee may contact the debtor regarding the debtor's property, and the court may issue certain orders to the debtor. These orders are sent by mail and may require the debtor to turn certain property over to the trustee, or provide the trustee with certain information. If the debtor fails to comply with these orders, the case may be dismissed and the debtor may be denied a discharge.
What is a trustee in a chapter 7 case, and what does he or she do?
The trustee is an attorney, an officer of the court, appointed to question the debtor about assets and debts, obtain the debtor's nonexempt property, and pay the expenses of the estate and the claims of creditors. In addition, the trustee has certain administrative duties in a chapter 7 case and is the officer in charge of seeing to it that the debtor performs the required duties in the case. A trustee is appointed in a chapter 7 case, even if the debtor's property is all exempt. The trustee will go over the bankruptcy schedules of assets and debts filed by the debtor, and will ask questions about property to determine if the debtor owns any nonexempt property.
What are the debtor's responsibilities to the trustee?
The law requires the debtor to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the debtor's nonexempt property. If the debtor does not cooperate with the trustee, the chapter 7 case may be dismissed and the debtor may be denied a discharge.
What happens to the property that the debtor turns over to the trustee?
It is used to pay creditors and administrative and other costs and is usually converted to cash, which is used to pay the fees and expenses of the trustee and to pay creditors. The trustee may receive a fee plus a percentage of the amount collected from the debtor.
What if the debtor has no nonexempt property for the trustee to collect?
If, from the debtor's chapter 7 forms and schedules, it appears that the debtor has no nonexempt property, a notice will be sent to the creditors advising them that there appear to be no assets to pay creditors, that it is unnecessary for them to file claims, and that if assets are later discovered they will then be given an opportunity to file claims. This type of case is referred to as a no-asset case. Approximately one-half of all chapter 7 cases that are filed are no-asset cases.
How are secured creditors dealt with in a chapter 7 case?
Secured creditors have valid mortgages or liens against property of the debtor. Property that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually permitted to repossess or foreclose on secured property, unless the value of the secured property greatly exceeds the amount owed to the creditor. The claim of a secured creditor is called a secured claim and secured claims must be collected from or enforced against secured property. Secured claims are not paid by the trustee. A secured creditor must prove the validity of a mortgage or lien and obtain a court order before repossessing or foreclosing secured property. The debtor should not turn any property over to a secured creditor until a court order has been obtained, unless so advised by his or her attorney. The debtor may be permitted to retain or redeem certain types of secured personal property.
How are unsecured creditors dealt with in a chapter 7 case?
An unsecured creditor is a creditor without a valid lien or mortgage against property of the debtor. If the debtor has (nonexempt) assets available to the trustee, unsecured creditors may file claims with the court within 90 days after the first date set for the meeting of creditors. The trustee will examine these claims and file objections to those deemed improper. When the trustee has collected all of the debtor's nonexempt property and converted it to cash, and when the court has ruled on the trustee's objections to improper claims, the trustee will distribute the funds in the form of dividends to the unsecured creditors according to the priorities set forth in the Bankruptcy Code. Administrative expenses, claims for wages, salaries, and contributions to employee benefit plans, claims for the refund of certain deposits, claims for alimony, maintenance support, and tax claims, are given priority, in that order, in the payment of dividends by the trustee. If there are funds remaining after the payment of these priority claims, they are distributed pro rata to the remaining unsecured creditors.
What secured property may a debtor retain or redeem in a chapter 7 case?
A debtor may retain and redeem certain secured personal and household property, such as household furniture, appliances and goods, wearing apparel, and tools of a trade, without payment to the secured creditor, if the property is exempt and if the mortgage or lien against the property was not incurred for the purpose of financing the purchase of the property. A debtor may also retain and redeem without payment to the secured creditor any secured property that is both secured and exempt and subject only to a judgment lien. Deadlines are imposed on the enforcement of these rights by the debtor during the bankruptcy case.
How can a debtor minimize the amount of money or property that must be turned over to the trustee in a chapter 7 case?
In a normal chapter 7 case the debtor is required to turn over to the trustee only the nonexempt money or property that he or she possessed at the time the case was filed. Many nonexempt assets of consumer debtors are liquid in nature and tend to vary in size or amount from day to day. It is wise, therefore, for the debtor to engage in some estate planning so as to minimize the value or amount of these liquid assets on the day and hour that the chapter 7 case is filed. The most common nonexempt liquid assets, and the assets that the trustee will be most likely to look for, include the following:
landlord and utility deposits,
accrued earnings and benefits,
tax refunds, and
It is usually advantageous for the debtor to take steps to insure that the value of each of these assets is as low as possible on the day and hour that the chapter 7 case is filed. By doing this the debtor will not be cheating or acting illegally; the debtor will simply be using the law to his or her advantage, much the same as a person who takes advantage of loopholes in the tax laws.
ANY OF THE FOLLOWING TYPES OF PROPERTY MAY BE COMPLETELY EXEMPTED IN VIRGINIA, UP TO THE MAXIMUM AMOUNT OF AN AVAILABLE HOMESTEAD EXEMPTION, AS DISCUSSED EARLIER.
Cash. If possible, the debtor should have no cash on hand when the chapter 7 case is filed. Further, if the debtor has received cash or the equivalent of cash in the form of a paycheck or the closing of a bank account shortly before the filing of a chapter 7 case, it may be spent on such items as food and groceries, the chapter 7 filing fee, the attorney's fee in the chapter 7 case, and the payment of up to $600 to creditors whom the debtor intends to continue paying after the filing of the chapter 7 case. Payments should not be made to friends and relatives, however, as the trustee may later recover these payments.
Bank Accounts. The best practice is to close out all bank accounts before filing under chapter 7. If a bank account is not closed, the balance of the account should be as close to zero as the bank will allow and all outstanding checks must clear the account before the case is filed. If the debtor has written a check to someone for, say, $50 and if the check has not cleared the account when the case is filed , the $50 in the account to cover the outstanding check will be deemed an asset of the debtor and will have to be paid, if requested, to the trustee.
Prepaid rent. If the debtor's rent is paid on the first day of the month and if the debtor's chapter 7 case is filed on the tenth day of the month, the portion of the rent covering the last 20 days of the month, if not exempt, will be deemed an asset of the debtor and may later have to be paid to the trustee. If possible, the debtor should make arrangements with the landlord to pay rent only through the date that the case is to be filed and to pay the balance of the rent from funds acquired after the case is filed. If this is not possible, the case should be filed near the end of the rent period.
Landlord and Utility Deposits. Unless they are exempt, the debtor should attempt to obtain the refund of all landlord and utility deposits before filing a chapter 7 case. Otherwise, the deposits, or their cash equivalents, will have to be paid to the trustee.
Accrued Earnings and Benefits. In most states, and under the federal law, only a certain percentage (usually 75%) of a debtor's earnings are exempt. Therefore, the trustee may be allowed to take the nonexempt portion (usually 25%) of any accrued and unpaid wages, salary, commissions, vacation pay, sick leave pay, and other accrued and nonexempt employee benefits. Normally, then, the best time to file a chapter 7 case is the morning after payday. Even then, if the pay period does not end on payday, the debtor may have accrued earnings unless special arrangements are made with the employer. If annual leave or vacation pay is convertible to cash, it should be collected by the debtor before the chapter 7 case is filed, as should any other nonexempt employee benefits that are convertible to cash.
Tax Refunds. In most states, a tax refund is not exempt and becomes the property of the trustee if it has not been received by the debtor prior to the filing of a chapter 7 case. Therefore, if the debtor is scheduled to receive a tax refund, a chapter 7 case should not be filed until after the refund has been received and disposed of. Even if the case is filed before the end of the tax year, if the debtor later receives a refund, the trustee may be entitled to the portion of the refund earned prior to the filing of the case. The best practice, then, is to insure that there will be no tax refund for that year.
Sporting Goods. If the debtor owns guns, fishing gear, skis, cameras, or similar items of value that are not exempt, he or she will later have to turn them, or their cash equivalent, over to the trustee, if requested. Such items should be disposed of prior to the filing of the case, especially if they are of considerable value.
May a utility company refuse to provide service to a debtor if the utility
bill is discharged under chapter 7?
If, within 20 days after a chapter 7 case is filed, the debtor furnishes a utility company with a deposit or other security to insure the payment of future utility services, it is illegal for a utility company to refuse to provide future utility service to the debtor, or to otherwise discriminate against the debtor, if its bill for past utility services is discharged in the chapter 7 case.
What should the debtor do if he or she moves before the chapter 7 case is closed?
The debtor should immediately notify the bankruptcy court in writing of the new address. Because most communications between a debtor and the bankruptcy court are by mail , it is important that the bankruptcy court always have the debtor's current address. Otherwise, the debtor may fail to receive important notices and the chapter 7 case may be dismissed. Many courts have change of address forms for debtors to use when they move, and the debtor should obtain one if a move is planned.
How is a debtor notified when his or her discharge has been granted?
Usually by mail. Most courts send a form called “Discharge of Debtor” to the debtor and to all creditors. This form is a copy of the court order discharging the debtor from his or her dischargeable debts, and it serves as notice that the debtor's discharge has been granted. It is usually mailed about four months after a chapter 7 case is filed.
What if a debtor wishes to repay a dischargeable debt?
A debtor may repay as many dischargeable debts as desired after filing under chapter 7. By repaying one creditor a debtor does not become legally obligated to repay any other creditor. The only dischargeable debt that a debtor is legally obligated to repay is one for which the debtor and the creditor have signed a reaffirmation agreement. If the debtor was not represented by an attorney in negotiating the reaffirmation agreement with the creditor, the reaffirmation agreement must be approved by the court to be valid. If the debtor was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and the attorney's statement with the court in order for the agreement to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, a debtor is not legally obligated to repay the debt, even if the debtor has made a payment on the debt since filing under chapter 7, has agreed in writing to repay the debt, or has waived the discharge of the debt. In order to sign the reaffirmation agreement, the attorney must believe that the agreement is in the debtor's (client's) best interest, and that the debtor (client) can repay that debt without undue hardship.
Why would a debtor want to reaffirm and repay a dischargeable debt?
There is no requirement to reaffirm any debt. Some debtors want to reaffirm a debt in order to retain collateral subject to a lien (such as a store account for furniture), to keep a line of credit or a credit card available after bankruptcy, or to pay a doctor so as to continue his or her professional services. However, the debtor should be aware that reaffirming a debt means that the creditor can take the debtor to court to enforce that debt after the bankruptcy discharge. It may also be unwise for the debtor to retain a credit card or line of credit that may encourage more problem indebtedness.
How long does a chapter 7 case last?
A chapter 7 case begins with the filing of the case with the court and ends with the closing of the case by the court. If the debtor has no (nonexempt) assets for the trustee to collect, the case will most likely be closed shortly after the debtor receives his or her discharge, which is usually about four months after the case is filed. If the debtor has (nonexempt) assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his or her other duties in the case. Most consumer cases with nonexempt assets last about six months, but some may last longer.
What should a person do if a creditor later attempts to collect a debt that
was discharged under chapter 7?
When a chapter 7 discharge is granted, the court enters an order prohibiting the debtor's creditors from later attempting to collect any discharged debt from the debtor. Any creditor who violates this court order may be held in contempt of court and may be liable to the debtor for damages. If a creditor later attempts to collect a discharged debt from the debtor, the debtor should give the creditor a copy of the order of discharge order and inform the creditor in writing that the debt has been discharged under chapter 7. If the creditor persists, the debtor should contact an attorney. A creditor who deliberately attempts to collect a discharged debt will probably be liable to the debtor for damages.
How does a chapter 7 discharge affect liability of cosigners and other
parties who may be liable to a creditor on a discharged debt?
A chapter 7 discharge only releases the debtor from his or her obligation to pay the debt. The liability of any other party on a debt is not affected by the chapter 7 discharge of the other debtor. Therefore, a person who has cosigned or guaranteed a debt for the debtor is still liable for the debt regardless of the debtor's chapter 7 discharge. The only exception to this rule is in community property states where the spouse of a debtor is released from certain community debts by the debtor's chapter 7 discharge.
What is the role of the attorney for a consumer debtor in a chapter 7 case?
The specific representation duties will be determined by the attorney, and should be specified in a representation agreement. The debtor's attorney typically performs the following functions in the chapter 7 case of a typical consumer debtor:
Analyzes the amount and nature of the debts owed by the debtor and determines the best remedy for the debtor's financial problems.
Advises the debtor of the relief available under both chapter 7 and chapter 13 of the Bankruptcy Code, and of the advisability of proceeding under each chapter.
Assembles the information and data necessary to prepare the chapter 7 forms for filing.
Prepares the petitions, schedules, statements, and other chapter 7 forms for filing with the bankruptcy court.
Assists the debtor in arranging assets so as to enable the debtor to retain as many of the assets as possible after the chapter 7 case.
Files the chapter 7 petitions, schedules, statements, and other forms with the bankruptcy court, and, if necessary, notifies certain creditors of the commencement of the case.
If necessary, assists the debtor in reaffirming certain debts, redeeming personal property, setting aside mortgages or liens against exempt property, and otherwise carrying out the matters set forth in the debtor's statement of intention.
Attends the meeting of creditors with the debtor and appears with the debtor at other hearings that may be held in the case.
If necessary, prepares and files amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor.
If necessary, assists the debtor in overcoming obstacles that may arise to the granting of a chapter 7 discharge.
Some of the above actions may not be included in a fee agreement and may result in additional attorney fees. The fee paid, or agreed to be paid, to an attorney representing a debtor in a chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Many attorneys collect all or most of their fee before the case is filed. Court filing fees must be paid in addition to the attorney's fees. If a homestead exemption is needed, a filing fee must be paid with respect to filing for homestead exemptions.
What if the debtor's bankruptcy forms are not prepared by an attorney?
It is not legally required that a debtor's bankruptcy forms be prepared by or under the direction of an attorney. However, it is difficult to properly prepare the bankruptcy forms without giving legal advice to the debtor. Because many non-attorney bankruptcy preparers attempt to give legal advice to debtors without having the legal training and knowledge necessary to give such advice, Congress has passed an amendment to the Bankruptcy Code that deals with non-attorney bankruptcy preparers. This law requires all non-attorney bankruptcy preparers to sign and print their names on the documents that they prepare and to give copies of all filed documents to the debtor. This law also provides that if a bankruptcy case is later dismissed because of the fraud or incompetence of the preparer, the preparer may be liable to the debtor. A bankruptcy preparer may also be enjoined from further work in the bankruptcy preparation business and may be criminally prosecuted if a bankruptcy case is dismissed because the preparer disregarded the requirements of the bankruptcy laws or rules.
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