A chapter 7 bankruptcy is when a debtor liquidates his/her debt. In this situation, the debtor lists out all debts, assets, and income. The Trustee looks to see if the debtor has any assets that can be sold to pay off unsecured creditors. Unsecured debt includes credit cards and medical bills, for example. Secured debt includes home mortgages and car loans.
So in a chapter 7 bankruptcy, the debtor lists all secured debt and either reaffirms the debt, surrenders the property, or redeems the debt. When a debtor reaffirms the debt, the debtor intends to keep making payments and keeps the property. If the debtor decides to surrender the property then the debtor gives back the property. So if the debtor decides that he/she no longer wants to keep his/her house because the home is underwater and/or can no longer afford the payment, then the debtor can give the property back and will no longer be responsible for the payments. If the debtor decides to redeem the debt then the debtor pays the appraisal value of the property at one time.
In a Chapter 7 bankruptcy, the debtor must list all personal property, including furniture, clothes, jewelry, etc. The Trustee sales assets that have value and are not exempt. Every state has its own exemptions. If your property is exempt then the Trustee cannot sale the property to pay unsecured creditors. This blog is intended for debtors filing in Florida. In Florida a debtor who has been a permanent resident of Florida for 2 years immediately preceding filing bankruptcy is allowed certain exemptions including: all equity in the debtor’s homestead as long as the debtor has lived in the home for 40 months or longer prior to filing bankruptcy. If the debtor has lived in the home for less than 40 months only $137,000 of equity in the home would be exempt. Furthermore, an individual debtor is allowed $1,000 for personal property and an additional $4,000 “wild card” if the debtor does not have a homestead. Joint debtors (husband and wife) get $2,000 for personal property and an additional $8,000 if they do not have a homestead. Other exemptions include 401K plans, tax deferred retirement plans, pensions, cash value of life insurance, IRA’s, disability income, and social security income. Finally, $1,000 of equity in a car is exempt.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made changes to the Bankruptcy Code, which makes filing a Chapter 7 bankruptcy more complicated. To be eligible for a Chapter 7 bankruptcy there is a 2 part test. First, there is the “means test”. This subjects debtors to an income based test. But if the debtors income is below the state’s median income, than the debtor is not subject to the means test. Additionally, debtors with primarily (more than 51%) business debts (including investment properties used as rental properties) may file a Chapter 7 bankruptcy regardless. However, even if the debtor passes the means test, the debtor still has to pass a second test known as the “abusive test”. The United States Trustee or any creditor can move to have the case dismissed. The bankruptcy Court could dismiss the case if the Court finds that the debtor has the ability to pay back a significant portion of the unsecured debts.
Prior to filing a Chapter 7 bankruptcy, the debtor must take a credit counseling class through a certified counseling company. The certificate of completion must be filed with the Chapter 7 petition and schedules. Additionally, the debtor will also be required to take another counseling course, debtor education, after filing the bankruptcy.
After the bankruptcy is filed the automatic stay begins immediately upon filing a bankruptcy petition. This is an automatic injunction prohibiting creditors, with certain exceptions, from collecting debt from the debtor. The automatic stay protects against foreclosure, repossession, liens, and harassing phone calls and letters.
A debtor is in chapter 7 bankruptcy for approximately 4 to 6 months. The debtor is required to attend a meeting of creditors known as a 341 meeting. During the meeting the Trustee will ask the debtor questions and the bankruptcy while the debtor is under oath. Creditors are notified of the 341 meeting and may attend the meeting to ask questions.
Usually, if there are no issues of fraud or misrepresentation, the debtor generally receives the discharge two months after the 341 meeting. The creditors are given 60 days to raise any objections after the 341 meeting.
