Boston Bankruptcy - Chapter 7 Information

What is Chapter 7?

Chapter 7 bankruptcy (under Title 11 of the United States Bankruptcy Code) is commonly known as liquidation bankruptcy, personal bankruptcy, or just plain "bankruptcy." It is also referred to as consumer bankruptcy, although businesses can also file under Chapter 7. The goal of Chapter 7 is to obtain a "discharge," which is a court decree that officially wipes out most of your prior debts.

For cases filed after October 17, 2005, a new set of guidelines is used to see if Chapter 7 is available as an option. This is called the "means test." Contrary to what the name suggests, it is not a test that a debtor must take and pass. It is merely a calculation of income and expenses taken in conjunction with family size to see how the numbers compare to other families in a particular location. In short, if your annual income exceeds the median income for your family size in your area as determined by the IRS, additional steps must be taken to see if you are eligible for Chapter 7. For those not eligible, Chapter 13 usually remains an option for obtaining debt relief. In any bankruptcy proceeding, regardless of which Chapter, you are required to list all of your assets and all of your debts on your petition.

The essence of Chapter 7 is that you are disclosing to the court all your assets and liabilities. An asset is anything you own or may have a right to own at some future date (for example, if you are in someone's will). The Bankruptcy Code allows the debtor to keep certain categories of assets up to a specific dollar amount. The rest, in theory, is sold by the appointed trustee in order to pay off the debts. In reality, the law that specifies what the debtor can keep (law of exemptions) is broad enough that most people are able to keep everything that they own. Basically, you can exempt any items normally used for your support and maintenance, such as clothing, furniture, household goods, and so forth. Thus, in most Chapter 7 cases there is no sale of assets. After your case is filed, a Trustee is appointed by the court. This Trustee will verify the information on the petition and, if necessary, oversee the sale of non-exempt assets.

I like to use the bus analogy to better explain exempt assets under Chapter 7. Imagine that you are getting onto a big bus and are bringing with you many belongings that you need day-to-day. In Chapter 7, everything on the bus is exempt and cannot be sold by the Trustee. When the bankruptcy case is over and you get off the bus, you still own everything that you brought on board, but most or all of your prior debts have now been erased.

Should you file Chapter 7?

The goal of going through a personal bankruptcy is to discharge or erase your existing debts and allow you a fresh start on your finances. In other words, once your discharge is granted, you are no longer legally required to repay the debts that accumulated before you filed your bankruptcy. Your creditors get whatever was obtained from the sale of your non-exempt assets. Most of the time when all assets are exempt, the creditors get nothing and are prevented by law from attempting to collect from you again.

When you come in for your free appointment, we will determine whether bankruptcy is the right solution for you. If so, we will then determine whether Chapter 7 makes the most sense and whether you qualify under the law. Generally, Chapter 7 is the less expensive, quicker and least burdensome than Chapter 13. Costs and fees vary depending on the number of creditors you have, complexity of your case, and other factors. Contact my office for a free evaluation of your case. If you meet the requirements, Chapter 7 allows you to discharge most or all of your debt. It allows you to do this regardless of what assets you have or how much you owe. In a nutshell, it allows you to walk away from your debts and start fresh.

What are some of the disadvantages?

If you are dealing with or anticipating multiple bankruptcies, keep in mind that a Chapter 7 discharge can only be granted if the cases are filed more than 8 years apart. Also, payments made to any relatives within one year prior to filing your bankruptcy case can be reversed by the Trustee and will have to be paid back to the Trustee. The assumption is that the debtor was transferring his money to family to shield it from the bankruptcy process. Once reversed, the funds will be pooled and divided equally among the creditors. This is one of the biggest mistakes people make, most often innocently, because the law is complex and a cash loan repaid to your mother seven months before filing Chapter 7 does not seem like a big deal. A similar rule exists for non-relatives, although the lookback period for them (such as credit cards, etc.) is only 90 days and most people don't care if the Trustee sues the credit card company to recover a payment.

What about your credit?

The bankruptcy will appear on your credit report for up to 10 years after you file. This is longer than other negative marks on your report, like late payments or foreclosures, which must be removed after 7 years. However, this is usually not as big a problem as most people think. Credit lending agencies know you won't be able to file another Chapter 7 bankruptcy for at least 8 years, and therefore, they don't have that risk to bear. Furthermore, credit agencies know that you have just gotten rid of an enormous burden of all your prior bills, that you have a clean slate, and are more likely to have the disposable income necessary to make timely payments and start rebuilding your credit. You will not get as high a credit limit right away as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn't be that difficult and you can rebuild your credit over time. What you will likely face is higher interest rates, required higher down payments, more points, etc. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record or other credit problems.

Are all debts dischargeable?

No. It is important to note that not all debts can be discharged. Examples of non-dischargeable debts are alimony, child support, taxes less than three years old, any debts obtained by fraud, and a few others. Also non-dischargeable is debt incurred in order to pay non-dischargeable taxes, such as tax payments paid with credit cards. Student loans are also generally not dischargeable, but there exists one exception called "undue hardship" which, if proven, allows the court to discharge student loans as well.

A word about recent spending and credit card cash advances

Any debt for more than $500.00 from any single creditor for non-essentials or "luxury" goods obtained within 90 days prior to filing the bankruptcy is presumed to be non-dischargeable. Similarly, cash advances on credit cards for more than $750 obtained within 70 days prior to filing are also presumed to be non-dischargeable. The obvious reason for this is to discourage debtors from "running up" their credit, and then filing bankruptcy. To be safe, it is best not to use your credit cards for anything other than food, clothing and other essentials during this three month period, or better yet, not to use them at all. A creditor may also try to ask the court not to discharge a debt if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy. You should consult with your attorney about each situation. Now, this provision is just a presumption of non-dischargeability, which means that the debtor will need to prove that the debt should in fact be discharged. Ordinarily a debtor does not have to prove anything, so it is important to watch out for these kinds of debt.

Discharging taxes and removing tax liens

Certain types of tax obligations, such as income taxes, may be discharged under specific circumstances. Many required factors must be met before any tax can be discharged under Chapter 7 or Chapter 13. In Chapter 7, the minimum requirements for discharging federal or state income taxes are: (1) it has been over 3 years since the returns were last DUE (including extensions), (2) the returns were timely filed or it has been at least 2 years since the returns were filed, (3) there was no fraud involved or attempts to evade the tax, AND, (4) the taxes were not assessed within the last 240 days.

If it has been over 3 years since your returns were last due and they have not been assessed in the last 240 days, BUT you have not yet filed the returns or there was some kind of fraud involved in filing them, then they may be dischargeable in a Chapter 13. Again, discharging taxes is an extremely complicated area, and you should definitely consult with a knowledgeable attorney before deciding whether to file based on dischargeability of your taxes and before you take any further steps with your taxes (such as filing past due returns). Sometimes filing a late return can work against you as far as being able to discharge those taxes in a Chapter 13, so definitely speak to an attorney before doing anything.

Tax Liens that have attached to property will survive a bankruptcy. What does that mean? It means that the lien will stay against your property regardless of your discharge of the underlying debt. So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you pay down the lien yourself in order to have it removed.

Discharging fraud judgments or debts where fraud may have been involved

Debts that you incurred which were the result of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud. However, the news isn't all bad. These types of debts may be discharged in a Chapter 13.

Can you be fired or denied employment because of a bankruptcy?

No. While an employer can usually find some reason to fire anyone, they cannot use bankruptcy as a basis for doing so.

Retirement accounts and pension plans

Whether or not you can exempt amounts held in a retirement account depends on numerous factors, including which set of exemptions you choose to use (your attorney will explain the difference between Federal and State exemptions, which is a choice that must be made prior to filing). According to the United States Supreme Court, if your retirement plan is ERISA approved, meaning that it contains a trust "anti-alienation" provision making it impossible to transfer or withdraw the funds prematurely, it is automatically exempt. Individual Retirement Accounts may be exempted only up to the amount reasonably necessary for the debtor's support and maintenance, taking into account all other anticipated and existing sources of income and expenses. Obviously, exempting retirement funds is very tricky and requires the expertise of an experienced bankruptcy attorney.

Getting rid of other liens recorded against your property

The bankruptcy code enables a broad range of powers which can enable you to avoid liens that were placed against your personal property or real property (like a house). It is too complicated an analysis to deal with here, but if you have liens against your property, make sure to discuss this with your attorney.

Types of liens you may be able to get rid of include judgment liens recorded against your home or specific personal property. Also, in a Chapter 13 junior mortgages against your home may be able to be removed under certain specific circumstances. This is not an option in a Chapter 7, so make sure to check out the Chapter 13 page and consult with an attorney.

Paying your taxes with your credit card

Debts incurred on your credit cards to pay taxes to the IRS will usually NOT be dischargeable in Chapter 7 but may be dischargeable under Chapter 13.

Do I need an attorney?

Federal Bankruptcy Law Section 527(b) contains this language: "If you decide to seek bankruptcy relief, you can represent yourself, you can hire an attorney to represent you, or you can get help in some localities from a bankruptcy petition preparer who is not an attorney." Some of these petition preparer services charge a minimal fee to prepare and file the bankruptcy paperwork, but they are not allowed to give you legal advice or address the many issued raised above. There are many horror stories on the web that clearly demonstrate the dangers of hiring a non-attorney.