When filing Chapter 7 bankruptcy makes sense

Melissa Lanier Attorney At LawMany people struggling with debt find relief by filing for Chapter 7 bankruptcy, as it may offer a quick way to get a financial restart. Chapter 7 discharges a variety of unsecured debts, so people dealing with extensive medical or credit card debt should consider speaking with a bankruptcy attorney.

The bankruptcy process is one that must be precisely followed and failing to do so may result in dismissal. A bankruptcy attorney protects their client from such an outcome, ensuring they meet all deadlines, file all paperwork and retain as many of their client’s assets as possible.

The basics of Chapter 7

Chapter 7 is the most common choice for consumer bankruptcy, and it’s also the fastest. Nearly all cases are resolved within six months of filing a bankruptcy petition, and many are completed within three months. Chapter 7 moves quickly because it’s the simplest form of bankruptcy. Also termed liquidation, during Chapter 7, the debtor’s assets are tallied up and, through a bankruptcy trustee, are sold to pay outstanding creditors.

That’s the basic process, but debtors can protect some (or all) of their “exempt” property, so they aren’t left with nothing. In fact, some states, like Texas, offer a generous list of exemptions that allow debtors to retain much of their property.

Once the trustee is done selling nonexempt assets and paying off creditors, any remaining unsecured debts are discharged. Creditors may object to the discharge, but have a short window to do so. This means debtors don’t have to wait long for their fresh start.

It is important to remember that Chapter 7 is personal bankruptcy. If any of the discharged debts have a cosigner, creditors can go after them if they do not file for bankruptcy as well. Chapter 13 is an alternative for people who want to protect a co-debtor from collection efforts.

Chapter 7 eligibility

Debtors must pass some eligibility requirements before they can file for Chapter 7. Those eligibility requirements include:

  • The debtor may not have completed a Chapter 7 case in the previous eight years.
  • The debtor may not have completed a Chapter 13 case in the previous six years.
  • If the debtor filed a bankruptcy petition in the past 180 days that was dismissed, they may not be eligible for Chapter 7. This applies when dismissal was due to a failure to comply with court orders or failure to appear in court.
  • The debtor must also pass a means test.

The means test is used to analyze the debtor’s finances to see if significant disposable income is present. If it is, the debtor may be required to file for Chapter 13 instead.

The debtor must provide comprehensive information about their previous six months of finances. The court will look at the debtor’s income during this period, and if their income is below the state’s median income level, the debtor qualifies for Chapter 7. The court will note changes in employment status, adjusting the debtor’s income accordingly. According to the Executive Office for U.S. Trustees, close to 90 percent of bankruptcy filers in 2013 passed this portion of the means test.

If, however, the debtor’s income is too high to qualify, the court will also look at their disposable income. In this instance, disposable income is defined as any income remaining after “allowable expenses.” Allowable expenses include things like groceries, housing, medical costs and clothing. If the debtor’s disposable income is low enough after this step, they may qualify for Chapter 7, even with a higher overall income.

How to file for Chapter 7 bankruptcy

If a debtor does qualify for Chapter 7, there is no barrier to start filing. It is recommended, though, that an experienced bankruptcy attorney guide this process for their client to ensure it is handled without error.

When filing for Chapter 7, this is what the process looks like:

  1. Take a bankruptcy counseling course – Before the court will allow a debtor to file for Chapter 7, they must complete a pre-file bankruptcy counseling course. This course should be provided by a reputable nonprofit credit counseling organization, and it must be completed within 180 days of filing a bankruptcy petition. During counseling, the agency will look for alternatives to bankruptcy, and inform the debtor on what the process involves.
  2. Complete the paperwork – When a debtor files all required paperwork to the court, they are officially filing a petition for bankruptcy. An attorney will assist their client with this step, but the debtor will need to provide supporting documentation. The idea is to get a clear picture of the debtor’s income, assets and debts.Once the petition is filed, an automatic stay is imposed on creditors. In most cases, they cannot continue to pursue outstanding debts while this stay is in effect.

    At this point, a bankruptcy trustee is appointed to the case and takes over the proceedings.

  3. Meet with creditors – Soon after the trustee takes over, they will organize a meeting between the debtor, their attorney and their creditors. During this meeting, the debtor may have to answer questions about their finances and information provided on bankruptcy paperwork. These questions may come from the creditors and the trustee.Following this meeting, the debtor’s eligibility for Chapter 7 is either confirmed or denied.
  4. Property exemptions are reviewed – If the debtor is eligible for Chapter 7, the trustee will review their property to determine what is exempt and what is not. In the majority of Chapter 7 cases, there are no nonexempt assets for the trustee to sell.
  5. Secured debts are resolved – Secured debts are not discharged through Chapter 7, even if they can be fully exempted from liquidation. The debtor may return the secured property to resolve the debt or they may pay what the collateral is worth to keep the property. Alternatively, the debtor may reaffirm the debt, which means they remove it from bankruptcy and attempt to maintain payments.
  6. Take another counseling course – Before the case is discharged, the debtor must take a second financial education class. This should also be provided by a qualified credit counseling agency, and helps debtors avoid financial problems in the future.
  7. Debts are discharged – At this point, the case is discharged, along with any outstanding eligible debts.

Within months of discharge, many people are already rebuilding and improving their credit. Chapter 7 can be a way back on financial track, even for those that believe there is no way to recover. There are always options for debt relief, and an attorney can help their clients choose the best path for their situation. For many, that’s Chapter 7.