The two types of bankruptcy most commonly filed by consumer debtors are called “Chapter 7” Bankruptcy and “Chapter 13” Bankruptcy, after the Bankruptcy Code sections where the applicable law is found. Whether you file under one Chapter or the other depends upon several factors, including your current income, the value of your assets, and why you feel the need to file a bankruptcy petition.
Chapter 7 Bankruptcy Definition
Chapter 7 of the Bankruptcy Code provides for “liquidation” of a debtor’s assets, and grants a debtor a “discharge” of unsecured debt when the 4-6 month process is complete. Filing a Chapter 7 petition stops or “stays” collection efforts or collection lawsuits by a debtor’s creditors. The debtor discloses all assets, debts, income, and expenses in the bankruptcy filing. All of a debtor’s assets comprise the bankruptcy estate except those which are exempted.
A Chapter 7 debtor can be an individual, a partnership, a corporation, or another business entity. 11 U.S.C. §§ 101(41), 109(b).
What is liquidation?
Liquidation is the sale of a debtor’s nonexempt property and the distribution of the proceeds of the sale to the debtor’s creditors.
What is bankruptcy discharge?
When a debtor is granted a discharge, he or she is no longer personally liable for that debt. In the case of secured property such as a car or home, a creditor’s only action to collect would be to repossess the car or foreclose on the home.
Bankruptcy is intended to give an honest but unfortunate debtor a “fresh start”. But only individual debtors and not business entities are entitled to a discharge. 11 U.S.C. § 727(a)(1).
Those considering filing a Chapter 7 case should keep in mind that a discharge is not guaranteed – a discharge may be denied. Also, liens on secured property are not discharged. There are many exceptions to discharge that you should be aware of, such as alimony and child support, certain taxes, and debts incurred by causing death, injury, or property damage while DUI. 1 U.S.C. § 523(a). Consulting with a bankruptcy attorney is advised.
If a creditor holds a lien on collateral, such as a car or house, that creditor is referred to as a secured creditor. A secured creditor may be able to repossess or foreclose after your bankruptcy case closes, unless you reaffirm that debt (i.e., promise to pay per the initial contract). 11 U.S.C. § 524(c).
If a creditor alleges that the debtor incurred debt by false pretense or fraudulently, that creditor must file a separate action to determine whether those debts are dischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).
It is also possible for the Court to revoke a Chapter 7 discharge upon request of the Chapter 7 Trustee, the U.S. Trustee, or a creditor if the discharge was obtained through fraud. If the debtor failed to disclose assets, or if the debtor makes a material misstatement in his or her filing. 11 U.S.C. § 727(d).
What is the automatic stay?
The automatic stay is in place the instant a debtor files a bankruptcy petition and lasts until the debtor’s bankruptcy case closes. It protects the debtor during the bankruptcy by stopping or preventing collection efforts, wage garnishments, bank account levies, car repossessions, and lawsuits by a debtor’s creditors. 11 U.S.C. § 362. Creditors listed by the debtor in his or her filing will receive Notice in the mail of the bankruptcy filing.
Who Qualifies to File Chapter 7 Bankruptcy?
The Chapter 7 Means Test
If you wish to file your bankruptcy petition under Chapter 7, you must pass the “means test.” The Means Test is an evaluation of your debt, your income, and family size in relation to the median income for your state.
What if I Previously Filed Bankruptcy?
There is no statutory limit on how many times one can file bankruptcy, but there are limits on how frequently debt can be discharged.
If you previously filed Chapter 7 and want to file another Chapter 7 and receive a discharge, you must wait exactly 8 years to so. If you want to file a Chapter 13, you must wait exactly 4 years to file in order to receive a discharge.
If you previously filed Chapter 13 and failed to complete your Chapter 13 plan, you must wait 6 years before filing Chapter 7. If you did complete your Chapter 13 plan, you must wait two years to file another Chapter 13.
The Required Credit Counseling and Financial Management Courses
In 2005 Bankruptcy law changed to include a requirement that every debtor take pre-filing Credit Counseling Course (11 U.S.C. §§ 109, 111) and the post-filing Financial Management Course. These can be taken online or over the phone, for debtors’ convenience.
Preparing Your Chapter 7 Petition and Schedules
Your personal information and social security number is set forth in your bankruptcy petition. Your schedules tell the Chapter 7 Trustee, the Court, and your creditors what your income, expenses, assets, and debts are. You will also set forth your intention regarding any secured property and the applicable exemptions to your assets, as well as answer targeted questions regarding your finances in the period prior to filing. Fed. R. Bankr. P. 1007(b). Additionally, you will file your Certification of Credit Counseling.
The fees for filing bankruptcy are found on the U.S. Court’s website as well as the site of the Bankruptcy Court in your jurisdiction. Bankruptcy forms are also found there.
If you cannot afford to pay the Chapter 7 filing fee, you can apply for a waiver. 28 U.S.C. § 1930(f). You can also apply to pay the fee in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8.
Your Statement of Intention
Your statement of intention will set forth the treatment of your secured creditors and serves to notify these creditors whether you intend to retain the collateral securing their claims, or whether you intend to surrender that collateral.
For example, if you own a car but are still making payments on the loan, you may wish to retain your car, even though you could surrender it and have the remaining loan balance discharged. If you can afford to do so and the creditor agrees, you can enter into a “reaffirmation agreement” and “reaffirm” that car loan, and keep the car. Alternatively, you may be able to “redeem” that car.
Exemptions Take Your Assets Out of the Bankruptcy Estate
There are federal exemptions as well as and exemptions that are applied to the value of a debtor’s assets to take those assets out of the bankruptcy estate and out of the reach of the Trustee, who then cannot seize and sell those assets for the benefit of your creditors. 11 U.S.C. § 522(b).
Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions. A debtor has the option of choosing between a federal package of exemptions or the exemptions available under state law. Whether certain property is exempt and may be kept by the debtor is often a question of state law. The debtor should consult an attorney to determine the exemptions available in the state where the debtor lives.
The Trustee Can Seize Your Non-Exempt Assets
When a Chapter 7 case is filed, a Trustee is appointed to liquidate non-exempt assets. 11 U.S.C. §§ 701, 704. If all of a debtor’s assets are exempt, the Trustee will file a “no asset” report with the Court.
If there are assets to be liquidated, creditors are required to file a claim, Section 726 of the Bankruptcy Code governs distribution of the property of the estate in that case.
The 341(a) Meeting of Creditors
A debtor does not usually have to go to court, but must meet with the Chapter 7 Trustee at the 341(a) Meeting of Creditors. During this meeting, the Trustee will put the debtor under oath and will confirm the debtor’s identity, address, and social security number. The Trustee will also also ask the debtor about income, expenses, assets, and debts, and will advise the debtor as to the possible consequences of filing bankruptcy including:
- The effect on credit history.
- The ability to file under a different Chapter.
- The effect of receiving a discharge.
- The effect of reaffirming a debt.
It is called the “meeting of creditors” because this is your creditors’ opportunity to appear and ask you under oath about any of your debt. Your attorney will likely know in advance whether one or more of your creditors intend to appear.
Chapter 13 as an Alternative to Chapter 7
If instead of filing a Chapter 7 petition you have filed your petition under Chapter 13, you will have experienced much the same procedure as if you had filed under Chapter 7, and also you will have filed a proposed repayment “plan” lasting three or five years. You will commence making monthly plan payments to the Trustee, who will in turn make distributions to your creditors in order of priority as set forth in that plan.
When you have made all plan payments, your Chapter 13 plan is completed and you will receive a discharge of that portion of unsecured debt which was not be paid through your plan.
Here’s a brief comparison of the two types of Bankruptcy that most debtors use. This is not meant to be an exhaustive comparison, so be sure to talk with a bankruptcy attorney about the specifics of your financial situation and goals, and he or she can advise you which is best for you.
When Would Chapter 7 Be Right for Me?
- If you pass the means test.
- If you have unsecured debt, like credit card debt or medical bills, that you have no hope of paying.
- If you need for collection efforts or lawsuits to stop.
- If your car was repossessed and you want it back.
- If you need to surrender your home to the mortgage lender because you can’t afford it.
- If you need to surrender your car to the auto lender because you can’t afford it.
- If you want to pay the lender what your car is worth and discharge the balance of the loan. This is called redemption.
When Would Chapter 13 Be Right for Me?
- If you do not pass the means test.
- If you have steady income to fund a Chapter 13 plan.
- If you are behind on a car loan and want to keep that car.
- If you are behind on your mortgage and want to keep that home.
- If you have private student loans and want to get them discharged.
- If you have a second mortgage and the house is worth less than the amount of the first mortgage, that can be stripped and discharged. This is called lien-stripping.
- If you are paying a car loan and the balance of the loan is greater than what the car is worth. This is called cram-down.
Chapter 11 as an Alternative to Chapter 7
Your business might consider filing bankruptcy under Chapter 11:
- If you want to continue business operations and avoid Chapter 7 liquidation.
- If you seek only to reduce debt.
- If you seek only to extend the time to pay debts.
- If you need more extensive reorganization of your business.
Please take note of this important caveat: the information on this page is not legal advice, nor is it intended to be legal advice. The purpose of this page is merely to introduce you to some basic Chapter 7 bankruptcy concepts so that you can have an informed discussion about your options when you attend your consultation with your attorney.