Chapter 7 Bankruptcy - John R. Cox, PLLC

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What is Chapter 7 Bankruptcy?

Chapter 7 is a section of the federal Bankruptcy Code that provides for outright cancellation of most types of personal debts without a repayment plan and for possible sale of some types of nonexempt property to pay such debts. Also known as “straight bankruptcy,” Chapter 7 is the simplest type of bankruptcy, because it is the process of liquidating property and using the proceeds to repay debts. Often, however, little property is actually liquidated because it is tied up with liens or classified as exempt from liquidation. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property that the law allows you to keep. In most cases, all of your property will be exempt.

Will I lose all of my property and possessions?

Under the Bankruptcy Code, exempt property is protected from creditors when you file bankruptcy. You may exempt any property that falls into one of the exemption categories up to a specific dollar amount. You will be able to keep this exempted property after you file bankruptcy. However, an exemption limit only applies to any equity you have in the property. Equity is the difference between the value of the property and what is owed on the property. For example, a car valued at $4000 with a loan of $3500 has an equity value of only $500.

Any property which is not exempt is sold at the direction of the bankruptcy trustee, with money distributed to creditors. If the property is secured by a loan, such as a car or home, and you are current on the payments, the equity is covered by your exemptions. If you elect to keep making payments on the loan you generally can keep this property after filing for bankruptcy. If all the equity is not covered by your exemptions, the trustee may elect to liquidate this asset and distribute the proceeds of the sale to creditors. Generally, in this case, you would be entitled to the value of your exemption in the asset as a cash payment.

Can I file Chapter 7 in order to stop a repossession or foreclosure?

If you are considering filing bankruptcy in order to save your home from foreclosure or avoid repossession of a car, Chapter 7 may not be your best option. This is because Chapter 7 bankruptcy does not eliminate the right of banks or car loan creditors to foreclose on your home or property to cover your debt. If you want to stop a repossession or foreclosure, you should consider your options under a Chapter 13 debt consolidation.

Can anyone file Chapter 7?

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) made filing for Chapter 7 more difficult. Congress created the “means test,” a formula aimed at calculating disposable income. If your income is above the median family income in Alabama, you may have to file a Chapter 13 case. In determining whether you qualify under the means test to file for Chapter 7 protection, BAPCPA takes into account all the income earned by your household (your spouse’s income will be counted). However, the analysis only looks back six months. Your means test figures will be based only on your household income over the last six months. If you earn more than the median family income in Alabama, you must fill out “means test” forms requiring detailed information about your income and expenses. If the forms show, based on standards in the law, that you have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that you cannot file a Chapter 7 case, unless there are special extenuating circumstances.

Do I need an attorney to file Chapter 7?

Although you may file Chapter 7 without the help of an attorney, a good attorney will assist you in filing the proper papers and help you keep as many of your assets as possible, while at the same time helping you to avoid any possible charges of fraud. A decision to file for bankruptcy should be made only after determining that bankruptcy is the best way to deal with your financial situation.

Frequently Asked Questions about Chapter 7 Bankruptcy

Can I file Chapter 7 in order to stop a repossession or foreclosure?
Will I lose my possessions?
What will happen to my debts?
How will filing bankruptcy affect my credit?
What debts survive bankruptcy?
How long will the proceeding last?
Do both husband and wife have to file bankruptcy?
How will lawsuits be affected?
Are employers notified?
Does a person lose any legal or civil rights?
May employers discriminate against me for filing bankruptcy?
May utilities discriminate against me for filing bankruptcy?
What if I want to pay a particular creditor after bankruptcy?
How will bankruptcy affect my co-signers?
What about my moral obligation to pay my debts?
Can I include taxes?
Can I include student loans?

Can I file Chapter 7 in order to stop a repossession or foreclosure?
If you are considering filing bankruptcy in order to save your home from foreclosure or avoid repossession of a car, Chapter 7 may not be your best option. This is because Chapter 7 bankruptcy does not eliminate the right of banks or car loan creditors to foreclose on your home or property to cover your debt. If you want to stop a repossession or foreclosure, you should consider your options under a Chapter 13 debt consolidation.
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Will I lose my possessions?
You will not lose all of your possessions. One of the basic misconceptions about a Chapter 7 bankruptcy is that you lose all of your assets. There is an important exception. Deleted text Out of all of your assets, you are allowed to keep your “exempt assets;” the idea being that you need certain basic items in order to make a successful fresh start after bankruptcy.

Exempt assets are defined by law. Both federal and state law provide numerous exemptions which may allow you to keep your home, car, and personal property. It is important to inventory all of your assets so that you can discuss them with your bankruptcy attorney. Quite often, especially in a family situation, all of your assets will be exempt, which means you lose nothing after filing bankruptcy. If it appears that you may lose some of your assets by filing a Chapter 7 bankruptcy, you should consider your options under a Chapter 13 debt consolidation proceeding.
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What will happen to my debts?
A Chapter 7 discharge is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditor not to attempt to collect them 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, and some persons are not eligible for a chapter 7 discharge.
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How will filing bankruptcy affect my credit?
A major concern for most people is the extent to which their credit will be affected by filing a Chapter 7 bankruptcy. Your credit will be adversely affected by filing a Chapter 7 bankruptcy. The fact is that your filing will be reflected on your credit report for a period of ten (10) years from the date your petition is filed. It is important to recognize that your underlying financial problems are the real cause of your negative credit, not the bankruptcy. Actually, bankruptcy can be the first step in reestablishing your credit. A Chapter 7 case will be on your credit report for a period of ten (10) years. However, any negative or bad information currently on your credit report will stay on your credit report for a period of seven (7) years and that time period does not start until you pay off your creditors in full or it is “written off” as a bad debt. As a practical matter, your credit will be affected for a period of at least seven (7) years without doing anything…and perhaps more. Therefore, Chapter 7 bankruptcy may be the first step in reestablishing your credit because it provides a beginning point for you to obtain a fresh start.
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What debts survive bankruptcy?
All debts of any kind or amount, including out-of-state debts, are dischargeable under Chapter 7 except those listed below. The following types of debts are generally not dischargeable under Chapter 7:

Debts for certain taxes, including but not limited to taxes that became due within the last three years.
If the creditor filed a complaint and if the court so rules, debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement (included here are certain debts for luxury goods or services and for certain cash advances made within 60 days before the case is filed).
Debts not listed on the debtor's Chapter 7 papers, unless the creditor knew of the case in time to file a claim.
If the creditor files a complaint and if the court so rules, debts for fraud, embezzlement or larceny.
Debts for alimony, maintenance or support, with certain very limited exceptions.
If the Creditor files a complaint and if the court so rules, debts for intentional or malicious injury to the person or property of another.
Debts for certain fines or penalties.
Debts for student loans unless not discharging the debt would impose an undue hardship on the debtor and his or her dependents.
Debts for death or personal injury caused by the debtor's operation of a motor vehicle while unlawfully intoxicated.
Debts that were or could have been listed in a previous bankruptcy case of the debtor for which the debtor would have but did not receive a discharge.

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How long will the proceeding last?
A Chapter 7 case begins with the filing of a petition and ends with the closing of the case by the court. If the debtor does not have any 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 only a few 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.
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Do both husband and wife have to file bankruptcy?
Generally, both husband and wife do not have to file bankruptcy jointly. Both husband and wife should file, however, if one or more substantial dischargeable debts are owed by both spouses. If both spouses are liable for a 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.
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How will lawsuits be affected?
The filing of a bankruptcy prevents any lawsuits from being filed or judgments being entered against you. If you file bankruptcy when there is a lawsuit against you, it can go no further. If a judgment has been entered, its enforcement can go no further without permission from the bankruptcy court.

If there are potential lawsuits against you, often the bankruptcy court offers a forum where the dispute can be rapidly settled--thus avoiding the time and expense of litigating the matter in state court.
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Are employers notified?
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 you have compelling reasons for not informing an employer in a particular case, you should review these reasons with your bankruptcy attorney because your attorney may be able to work with the trustee to make other arrangements to obtain the necessary information.
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Does a person lose any legal or civil rights?
Filing a Chapter 7 bankruptcy is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
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May employers discriminate against me for filing bankruptcy?
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 governmental units to discriminate against a person as to the granting of licenses, permits, and similar grants because that person has filed under Chapter 7. It is also illegal for governmental student loan or grant units to deny a student loan or grant solely on the basis of filing.
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May utilities discrimitate against me for filing bankruptcy?
If, within twenty (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 that utility company to refuse to provide future utility services to the debtor, or to otherwise discriminate against the debtor, if the bill for past utility services is discharged in a Chapter 7 case.
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What if I want to pay a particular creditor after bankruptcy?
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 after filing under Chapter 7 is one for which the debtor and the creditor have entered into what is called 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 a 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.
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How will bankruptcy affect my co-signers?
A Chapter 7 discharge releases only the debtor. The liability of any other party on a debt is not affected by a Chapter 7 discharge. A person who wants to protect co-signers should consider his or her options under a Chapter 13 debt consolidation.
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What about my moral obligation to pay my debts?
The decision whether or not to seek bankruptcy relief is a difficult one. One should remember that bankruptcy is a right guaranteed by law and provided for in the Constitution of the United States of America. An individual should consider it in terms of the hardship it may avoid for his or her family. It may be that it is the only way to provide them food, clothing and shelter in hard times. One must often decide that his or her obligation to provide for children or loved ones outweighs the obligation to pay his or her creditors.

Chapter 13 debt consolidation provides yet another option. In some cases, a debt consolidation proceeding may provide a viable mechanism for repaying creditors as well as solving other problems.

Also, you should remember that filing bankruptcy does not prevent you from voluntarily paying your debts at a later time if you are able. The bankruptcy discharge only prohibits your creditors from forcing you to repay debts.

To learn more about what the Bible says about Bankruptcy, click here.
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Can I include taxes?
Generally, taxes are not avoidable when you go through a straight Chapter 7 bankruptcy. This is true whether it be income tax, employer withholding tax, or social security. However, because there are some limited technical exceptions, your tax obligations should be closely reviewed with your bankruptcy attorney.

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Can I include student loans?
Generally, student loan obligations are not dischargeable in a Chapter 7 bankruptcy. However, there are some exceptions to this general rule. Therefore, your student loan obligations should be closely reviewed with your bankruptcy attorney.
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