Chapter 7 Bankruptcy: How It Can Help You
Chapter 7 bankruptcy, which is governed by 11 United States Code § 7 and is also called the “liquidation chapter,” can be a very useful tool to allow you to have a financial restart or fresh start, and this article explains the benefits of how chapter 7 bankruptcy can help you.
Here are a few scenarios of how chapter 7 bankruptcy can be used to help you:
- If you are behind on credit card bills;
- If you are behind on medical bills;
- If you have lawsuits or judgments against you;
- If your wages are being garnished or about to be garnished;
- If you bank account is frozen due to a judgment or a set off;
- If you have a judgment lien against any property that you own;
- If you are behind on your homeowner’s association or condo association dues;
- If you are behind on your car payment and would like to walk away from the car.
Chapter 7 Schedules and Documentation
A chapter 7 involves compiling a complete picture of your financial situation. In a nutshell, this includes a review of all of the assets that you own, a list of all of your creditors, your income and expenses, whether or not you have any leases, whether or not someone else is a co-debtor on any of your debts, a review of any prior bankruptcies you may have filed, and the completion of the Statement of Financial Affairs. In order to prepare all of this, you must compile financial documentation to back up everything that you schedule.
The Statement of Intention
The Statement of Intention for Individuals Filing Under Chapter 7 is the document that lets the court know what you would like to do with assets that are secured. It is typically used for cars, homes, or other secured assets. For example, if you are current on your car payments are would like to keep your car past the chapter 7, you can indicate so on the Statement of Intention. If you would to surrender your car and walk away, you can also indicate that. You may also be able to redeem the asset, which can be a useful tool to lower your monthly payment on a car.
Credit Counseling
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA), and one of the important provisions of BAPCA is that everyone who files under chapter 7 must take a credit counseling course before they file for bankruptcy. This course can be taken online or if you do not have access to a computer, it can also be taken over the phone.
The Means Test
BAPCA also put into place the “Means Test” which looks at the median income for the State of Maryland for your household size. If you are at or under the median income, you do not have to take the means test and you qualify for a chapter 7. If you are over the means test, a presumption of abuse arises that must be overcome in order to keep you in a chapter 7, or you can convert your case to a chapter 13.
The Automatic Stay
One of the most important benefits to filing a chapter 7 is that once your case has been filed with the court, an automatic stay goes into place under 11 U.S.C. § 362 which stops all collection activity, including calls, letters, garnishments, foreclosures, and any other collection activity. The automatic stay gives you the protection you need to reorganize your debts.
The Chapter 7 Trustee
In every Chapter 7 case, the U.S. Department Justice, Office of the United States Trustee, appoints a court officer called a Chapter 7 trustee to oversee your case and determine if there are any assets to distribute to creditors. The trustees review your bankruptcy petition and schedules and determine if there are any assets worth pursuing to distribute to creditors. In most cases, all of your assets can be exempted under Maryland law to allow you to keep your possessions, cars, and home. If you have any assets that are unexempt and the trustee decides to pursue those assets because he thinks they can be used to pay creditors, the trustee has the power to sell those assets. This scenario does not often happen and usually occurs only for significant assets such as a home with a large amount of equity that cannot be exempted under Maryland law.
The 341 Meeting of Creditors
30-45 days after your case has been filed, the clerk of the court schedules what’s called a 341 meeting of creditors. Although this is an opportunity for creditors to ask you questions, creditors rarely come to the 341 meeting. The 341 meeting has morphed into the opportunity for the chapter 7 trustee to ask you some questions about your case under oath. In Maryland, these meetings typically last 10-15 minutes and are very routine.
Asset Case versus No Asset Case
Chapter 7’s generally fall into two categories:
- A case that there are assets that the trustee can sell to distribute to creditors; or
- A case that there are no assets that the trustee can sell to distribute to creditors.
Most routine chapter 7 cases are no asset cases, which means that all of your assets are either exempt, not part of the bankruptcy estate, or do not have sufficient value for the trustee to distribute. In this case, the trustee will issue a report of no distribution, which means that after looking at your financial situation, the trustee has not found any assets to distribute to creditors.
If your chapter 7 case is an asset case, the trustee has determined that you have assets that can be sold to distribute to creditors. At this point, your attorney can negotiate with the trustee to protect the non-exempt assets.
Financial Management Course
After your case is filed, you must take an additional course mandated by BAPCA called the financial management course. Similar to the credit counseling course, this course can be taken online or over the phone. If you do not take this course within the deadline, your case will be closed without a discharge. In order to receive a discharge, you will have to reopen your case and ask the court for an extension to take the financial management course, and upon successful filing the certificate of financial management, the court can enter the discharge in your case.
The Discharge Order and Discharge Injunction
If everything goes smoothly in your case, after you’ve completed your 341 meeting of creditors, received a no asset report or the assets have been distributed properly, the date of object to discharge has passed and you have taken the financial management course, the case is ready for a judge to review to sign a discharge order. The discharge is the court order that eliminates your debts. The discharge order also serves as an injunction, preventing all creditors scheduled in your bankruptcy from taking any action against you in the future.