What is Chapter 7 Bankruptcy, and should you file Chapter 7 bankruptcy? What are the reasons to file for Chapter 7 bankruptcy? These are a few of the questions that will be answered in this blog.
Chapter 7 bankruptcy or otherwise known as liquidation bankruptcy or fresh start bankruptcy, is when an individual or couple file for bankruptcy to eliminate all of their dischargeable debt and also have any assets which are not exempt of all liquidated by the bankruptcy trustee. When working with a bankruptcy attorney, most of the assets, the average individual or couple, will be exempted from liquidation. This means that more than likely none of your assets will be taken by the bankruptcy trustee and liquidated to pay your debts. nonexempt assets are usually high-value items such as jewelry, second cars, jet skis, boat, a second home or in investment portfolios just as in bonds. exempt assets on the other hand are motor vehicle up to a certain value, reasonably necessary household goods and furnishings, household appliances such as washing machines and dryers, jewelry up to a certain value, pension and retirement funds, and any other asset that is exempt under the bankruptcy code. it is very important to use the services of an experienced attorney to verify if any alternatives may help your situation, such as Chapter 13 bankruptcy, debt settlement or a mortgage medication.
What is not dischargable in Chapter 7 Bankruptcy?
It is important to note that not all debts are dischargeable in bankruptcy, such as child support obligations, student loan debt (except in special circumstances), lawsuits involving fraud that you’ve committed, lawsuits involving a motor vehicle accident in which you were intoxicated in and of course taxes (although these are dischargeable under certain circumstances).
The first requirement to file Chapter 7 bankruptcy is the debtor must pass what is called a Means Test. This essentially means that the individual or couple filing for bankruptcy, must be at or below the median income level for the household they reside in, depending on household size. Hustle size is the number of people living in the household, not only income earners, but also dependence, such as children, the elderly or the disabled who live in the household. If you are at or below this number, you may file Chapter 7 bankruptcy, but if you’re above this number, you will be forced to file Chapter 13 Bankruptcy (you can read more about Chapter 13 bankruptcy in another blog we have posted).
Just as in chapter 13 bankruptcy, someone filing for Chapter 7 bankruptcy must take to credit counseling courses. The first credit counseling course must be taken prior to filing your bankruptcy petition, or your petition will be dismissed. The second credit counseling course is taken after the 341 Meeting of Creditors. Essentially the first credit counseling course is “how you got yourself in a position where you need to file bankruptcy” and the second credit counseling course could be considered “how to prevent yourself from needing to file bankruptcy again in the future”. Both courses are extremely informational and educational, and probably actually should be taught in high school.
The bulk load of the work going into a chapter 7 bankruptcy filing is the petition and schedules. The bankruptcy petition could be anywhere from 50 pages all the way up to 100 pages, with the majority of it being extremely technical, which is one of the main reasons you should seek the advice of an experienced bankruptcy attorney and not attempt this on your own. The petition will list all your financial information, all your income information and all your debts, including the debtors. There are numerous topics covered in the petition, to extensive for a blog of this nature, but be assured that every circumstance of someone’s financial situation is covered.
There will also be, what many consider a court appearance, the “341 Meeting of Creditors”. This is basically a meeting between you and the bankruptcy trustee, to go over your bankruptcy petition and to verify that the petition is correct and there’s nothing that needs to be added or taken away. But in reality, this is simply a way for the bankruptcy trustee to assure that you have not left out any assets, which they may seize and sell to cover your debts and this is also how the bankruptcy trustees make the vast majority of their money.
It’s important to realize that there are some drawbacks to filing bankruptcy. The biggest and most obvious is the initial hit your credit score and the fact that bankruptcy will be listed on your credit report for 10 years. Although our law firm offers a number of options for our client to get their credit score above 700, in as little as two years and we have had clients who have purchased homes in as little as three years after filing for bankruptcy. Along with the hit to your credit score, comes inevitable lack of credit, which many people are afraid of. But don’t forget it was credit that got you into the situation in the first place (in many instances). But shortly after receiving a bankruptcy discharge, you will be able to obtain a credit card and stop rebuilding your credit score.
What are the Benefits of Chapter 7 Bankruptcy?
The main reasons that you file Chapter 7 bankruptcy is to discharge unsecured debts, such as credit card debts, loans, lawsuits and medical bills. This is important because you get a fresh start after discharging these debts. Most people at this point would think, well that’s obvious, everyone knows that’s what bankruptcy is for. The most people do not realize the extent of the benefits of filing Chapter 7 bankruptcy. First of all when you file Chapter 7 bankruptcy you receive what is called the automatic stay, this is a legal provision of the bankruptcy code which stops all debt collection, foreclosures, evictions, lawsuits and other judgment collection practices. Basically, if you have debt collectors calling your house on a daily or weekly basis, this. That as soon as you file. Some creditors might not have gotten the information in time, so once you file, you can tell them that they no longer have the right to ever call you again because you file for bankruptcy. If you have upcoming court dates that you have to go because of being sued by credit card or any other lawsuit, you can send to the court what is called a (Suggestion of Bankruptcy), which essentially informs the court that you have in fact file bankruptcy, which suggests you will eventually receive a bankruptcy discharge which will eliminate the debt in question in the court proceeding. Just the peace of mind of no longer fearing your phone ringing, is one of the most beneficial aspects of filing for either Chapter 7 or Chapter 13 bankruptcy. Some less known reasons are also psychological, while some are a benefit to your credit history, even after the initial hit to your credit score. Once your unsecured debt is wiped out, your debt to income ratio changes dramatically and this all by itself will help your credit score to start increasing shortly after the initial hit pay your credit report will take. Finally, it can be argued, that the psychological benefit of obtaining a fresh start is by far the biggest benefit of filing Chapter 7 bankruptcy. For most, before filing for bankruptcy, they are hounded on a daily basis by creditors and other debt collectors. These people wake up thinking about their debt, think about all day long, and then go to bed thinking about their debt. This situation is what many consider a nightmare and once receiving your discharge from bankruptcy, the nightmare is finally over and you have a fresh start on your new life.
Joseph F. Botelho, Esq.
BOTELHO LAW GROUP
Attorneys At Law
901 Eastern Ave.
Fall River, MA 02723