Chapter 7 eliminates most of a debtor’s unsecured debts. A debt is unsecured when the debtor did not pledge a personal property or real property as security for a loan. Sometimes, a security agreement is made without that the debtor even notices it. For example, if you go to Bestbuy and purchase your new television with your bestbuy credit card. Your credit card contract most likely will say that everything you buy will be collateral for your bestbuy credit card balance. Another example is a title loan, you pledge your car as security for the loan. That means if you don’t pay your loan as agreed on the title loan company could sell your car to satisfy their claim against you.
What is a chapter 7 bankruptcy case?
Lawyers often refer to chapter 7 bankruptcy as the liquidation chapter. In almost all chapter 7 bankruptcy cases, the debtor filed bankruptcy and receives his discharge order without losing any property. The debtor’s bankruptcy attorney will determine before filing if any of the clients property is un-exempt and might have to be turned over to the trustee. The trustee then, would sell, liquidate, the property. When is property un-exempt? This depends on the exemptions in your state. Every state uses either its own exemptions or federal exemptions. Missouri and Illinois have their own exemptions. A car for example can be exempt for up to $3000. The debtor might have additional exemptions available he can apply to the value of the car. However, if the car has a value of $20,000 and no loan is on the car, the debtor would not lose his property, but he either would have to pay the un-exempt portion to the trustee or file a chapter 13 bankruptcy case and pay the un-exempt portion of the life of the chapter 13 plan.
Even though the bankruptcy law was changed in 2005, most people still qualify to file chapter 7 bankruptcy. One of the new requirements for a chapter 7 is the means test.
The Means Test
The means test looks at the average income for the last 6 months before filing. If that income is below the average income in your county, the debtor automatically qualifies for a chapter 7. What if the income is above the average income? Even lawyers sometimes answer this question incorrectly. If someone is above the median income, it does not mean that this person cannot file a chapter 7 bankruptcy case. It only means that the complete means test must be filled out. If the result is that no disposable income is available to the debtor, the debtor qualifies for a chapter 7 bankruptcy. Not the income but the expenses the debtor can deduct will decide whether the debtor qualifies to file for chapter 7. In the case the calculation shows some disposable income, the debtor will have to pay this amount in a chapter 13 bankruptcy to unsecured creditors.
The Chapter 7 Process
After a bankruptcy petition is filed with the court, the automatic stay goes into effect. This means that creditors must cease harassment and collections efforts until the case is over or the automatic stay is lifted through a motion for relief. The creditor may not attempt to garnish wages, seize the consumer’s bank account or make telephone calls.
Around one month after filing, the 341 meeting takes place. This meeting is also sometimes called meeting of creditors even though in almost all cases no creditors actually come to the meeting. Normally, only the bankruptcy trustee, the debtor and debtors’ attorney attend that meeting. The meeting takes only a few minutes. The trustee check the debtor’s social security card and picture I.D., and will ask if everything listed on the petition is true and correct. Within 3 months after the trustee’s meeting the court will mail our a discharge order which concludes the process in a chapter 7 bankruptcy case.
The Debts Covered by Chapter 7
The discharge order will say that all dischargeable debt is discharged and all non-dischargeable debt is not discharged. That does not help a debtor if he wants to know if for example a specific tax debt was discharged and wiped out through the bankruptcy case. Chapter 7 bankruptcy discharges will eliminate credit card bills, payday loans, medical bills, utility bills, unsecured personal loans and other unsecured non-priority debt. Student loans are normally not discharged. It is possible to discharge student loans but only in very limited circumstance.
Child support obligations are also not dischargeable in neither chapter 7 nor chapter 13. However, some debt that accrued in connection with a divorce proceeding may not be discharged in a chapter 7 but might be discharged in a chapter 13 bankruptcy case. The discharge in chapter 7 and 13 is not always the same. Income taxes for the last 3 years are normally not discharged. However, older income taxes might be dischargeable if certain conditions are met.