What is Chapter 7?
A Chapter 7 is a procedure under the U.S. Bankruptcy Code to obtain Court protection of a person's or business's property, and liquidate assets that the debtor cannot exempt and keep. An individual or couple can obtain a discharge from debts (with some exceptions) while retaining some exempt assets such as a home place, household goods, and an automobile, as long as the items do not exceed a certain value. Other assets may be sold by a Trustee appointed by the Court who distributes the proceeds to the creditors from the sale of the assets. A debtor cannot obtain a discharge of debts if he/she obtained a discharge in a previous bankruptcy case filed within 6 years.
Who is eligible to file a Chapter 7 petition?
Individuals, couples, sole proprietors of unincorporated businesses, partnerships and incorporated businesses.
How do I file a Chapter 7 petition?
Generally speaking the assistance of a lawyer is needed in order to advise you concerning your rights and obligations in a Chapter 7 proceeding, and to prepare the necessary papers for filing with the Court.
How does a Chapter 7 proceeding protect me from my creditors?
A Restraining Order is entered immediately upon the filing of the petition that prevents all of your creditors from filing lawsuits, starting foreclosures or repossessions, or making direct contact with you concerning your accounts. Secured creditors may obtain permission from the Court to foreclose or repossess property if you are not able to continue payments to them. Also, if the property securing the debt has value beyond the amount of the debt, and the equity is more than you are entitled to exempt, the Trustee may sell the property.
How much does it cost?
The Court charges a $175.00 filing fee which has to be paid when your petition is filed. Attorney's fees generally start at $600.00 in non-complex cases that do not involve a large number of creditors. The attorney's fee increases in accordance with the complexity of the case, and the number of creditors involved.
What property can I exempt and keep?
A person can file a Chapter 7 petition and retain ownership in property and in an amount as follows:
- Equity in real estate or personal property used as a residence, or burial plot...$10,000.00; however, if no residential property is claimed as exempt, a portion of that can be used to exempt other assets up to $3,500.00. If married couple files jointly, the combined real estate exemption is $20,000.00 equity.
- Automobile...equity up to $1,500.00.
- Household and related personal property...$3,500.00 plus $750.00 for each dependent not to exceed $3,000.00 for dependents.
- Professional books or tools of trade...$750.00
- Several other exemptions are permitted for life insurance, health aids, and compensation for personal injury or wrongful death claims.
- Tax-exempt IRA's, 401-K plans, etc.
- Excluded from the allowable exemptions is personal property purchased within 90 days of the bankruptcy filing.
The area of exemptions can be complex, and other variables can affect the exemptions such as the nature of the ownership interest and the existence of liens on the property in question.
What is the procedure involved in a Chapter 7 proceeding?
A petition under Chapter 7 is filed with the Court which results in an automatic Restraining Order being entered to prevent action being taken against you or your property by your creditors. A Trustee is appointed by the Court to review the petition and to meet with you and your lawyer in order to determine if you own any assets besides what you are entitled to exempt and retain. If you have assets valued at more than what you can exempt, then the Trustee will sell that property and distribute the proceeds to your creditors. Usually about six months after the petition is filed, the Court will enter an Order discharging or canceling your debts that terminates your legal obligation to your creditors. There are however, some exceptions to discharge.
What debts are not discharged in a Chapter 7 proceeding?
Debts that may not be discharged include most taxes; debts obtained through false pretense, fraud embezzlement, or larceny; debts of over $1,000.00 for luxury goods or services obtained within 60 days of the filing or cash advances of more than $1,000.00 obtained within 60 days of the filing under a consumer credit arrangement; debts not listed in the petition; child support and alimony; debts based upon willful or malicious injuries to personal property of another; fines or penalties owed to the government; government guaranteed educational loans; debts based upon death or injury arising from debtor's intoxicated operation of a motor vehicle, and debts incurred to pay otherwise non-dischargeable taxes. The issue of dischargeability can be a complex one, and there are other variables and limitations beyond the exceptions described which should be discussed with your lawyer.
Will I lose my house and car if I file a Chapter 7 petition?
If the property is not worth more than what you owe on it, plus your exemption allowance, you can generally retain ownership so long as you continue to pay the mortgage or lien holder.
How does a Chapter 7 proceeding affect my credit standing?
A credit reporting agency such as a Credit Bureau can report that you filed a Chapter 7 proceeding for a period of 10 years.
Who will be notified that I have filed a Chapter 7 petition?
Each of your creditors will be notified, and the Credit Bureau will normally be aware of your filing by checking the Court records. Your employer is generally not notified.
Can my employer fire me if he/she finds out that I filed a Chapter 7 petition?
No. Federal laws prohibit your employer from firing you or discriminating against you simply because you have filed a proceeding under the Bankruptcy Code.
What effect does a Chapter 7 proceeding have on co-signers?
If you have a debt that someone else has co-signed, your filing Chapter 7 will not protect the co-signer from the creditor. Although your legal obligation on the debt is discharged, the creditor may still look to the co-signer for payment.
Do I have to appear in Court?
You will need to be present for a meeting with your Trustee in the Bankruptcy Court building. No judge will attend this meeting. Your lawyer will be present with you, and the purpose of the meeting is to give the Trustee an opportunity to ask you questions concerning your petition and your assets.