Chapter 7 is a legal tool in the United States that’s geared toward helping people erase many of their loans when they fall on hard financial times. In many circumstances, this form of bankruptcy can allow people to essentially erase different types of debts. This might include things that you owe like car loans, credit card debt, medical debt, etc. Filing for bankruptcy is more common than many realize.
A lot of people end up in financial trouble for one reason or another. According to the stats, around 1.5 million people file for bankruptcy each year. If you are suffering from financial woes, you certainly aren’t alone. Like those others, you might want to consider learning more about Chapter 7 bankruptcy, how it can help, what you need to do, etc. This is not always the best solution for everyone—there are other options that can help those who are in debt. However, it is an option that you may want to keep in mind. Let’s get a closer look at how it works.
What Is Chapter 7?
If you are someone who has a substantial amount of debt—more than you could possibly pay back—you need some help. If you are in this situation, choosing to go through Chapter 7 could be a good option to consider.
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 sells assets that have value and are not exempt. If something is considered exempt, it means that it is a piece of property that won’t have to be sold to pay off the debt. As the name suggests, it is exempt from being included in the assets. If your property is exempt, then the Trustee cannot sell the property to pay unsecured creditors. Every state has its own exemptions.
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.
These include all equity in the debtor’s homestead as long as the debtor has lived in the home for 40 months or longer before 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.
Who Can’t File for Bankruptcy?
In some cases, people are not allowed to file for bankruptcy for one reason or another. For example, if you have gone through Chapter 7 in the last eight years or Chapter 13 in the last six years and your case was successful, you will not be able to file for another Chapter 7. You would have to wait until that time period has elapsed and can then see whether you qualify.
For example, if you had to go through Chapter 7 five years ago due to some financial issues, you would have to wait another three years before you could file again. The waiting period might seem harsh, but it is there to help prevent abuse of the system. If there weren’t a waiting period, it is likely that people would simply rack up debt, file bankruptcy, and move on.
Additionally, if you filed for either Chapter 7 or Chapter 13 and your case was dismissed in the last 180 days for one of the reasons that follow, you likely won’t be able to file for Chapter 7.
This would be the case if you violated a court order, requested the dismissal after a creditor asked for relief from the automatic stay, or if the court ruled your filing was fraudulent or abusive toward the bankruptcy system.
Of course, there is also the likelihood that the court will dismiss your case if they believe you have purposely tried to defraud the creditors. If you attempted to cheat the creditors, or if you tried to conceal assets to keep them for yourself instead of paying the debt, this can become a red flag for the courts.
One of the things that the trustee would look for include selling items and assets to relatives or friends for less than the fair market value. This is always a clear indicator to the court that you are simply trying to keep those items safe, so you can have access to them later without the court being able to take them to pay for your debts.
Some of the other issues trustees will look for include concealing property or money from business partners, lying about income or debts on credit applications to try to get approved, or running up debts for luxury items that you do not have a way to pay off.
Keep in mind that when you sign bankruptcy papers, you are doing so under penalty of perjury. This means that if you were to lie about elements on your paperwork, such as not disclosing property, your case can be dismissed when the court discovers the deception. As frightening as bankruptcy might seem, it’s important to be honest. It’s also essential to get help from legal professionals.
Filing for Chapter 7 Has Become More Complicated Over the Years
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 two-part test.
First, there is the “means test”. This subjects debtors to an income-based test. The test is used to determine whether you have enough disposable income to pay off at least part of the unsecured debts over the course of five years. Disposable income is determined to be the amount of your money left over each month after subtracting required payments, such as current payments you owe, and allowed expenses. Unsecured debts are those that aren’t backed by collateral. This includes personal loans, medical bills, and credit card balances, for example.
The trustee will also look at Schedule I: Your Income, and Schedule J: Your Expenses to get a better look at your current income and the amount you are spending. If the net amount that you have left over each month after paying your bills will allow you to make monthly payments to creditors, the trustee might then recommend to the court that your case be converted to a Chapter 13 bankruptcy rather than a Chapter 7.
If the debtor’s income is below the state’s median income, then 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. Again, these tests are in place to help ensure fairness in bankruptcy to the creditors. Otherwise, a lot of people could run up debts without ever having the intention to pay.
You Need to Take a Credit Counseling Class
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 four to six 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 about 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.
Get in Touch with The Orlando Law Group for Your Chapter 7 Bankruptcy Case
Bankruptcy law in Florida can be complex and tricky. It is not something you want to handle on your own. The best course of action is to work with The Orlando Law Group’s legal professionals who have extensive experience in the field and who can provide you with the guidance and help you need. They can ensure that you have the best outcome possible for your particular bankruptcy case.