Chapter 7 Bankruptcy
We understand your questions and we can help. Chapter 7 is the section of the Bankruptcy Code that allows for the liquidation of assets to satisfy one’s debts. However, it is extremely rare that an individual consumer’s assets or belongings are actually sold. Once your Chapter 7 bankruptcy proceedings are complete, most of your debts are discharged, and you no longer owe your creditors money for those debts.
However, a Chapter 7 bankruptcy, which is preferable to a Chapter 13 bankruptcy for an individual consumer, if only because there is no repayment plan associated with the proceedings, does not apply to everyone. If you own a home, the bankruptcy Trustee will want to know how much equity there is in your home, or if you are behind on your mortgage payments. Also, there is a limit in terms of household income in order to qualify for a Chapter 7 bankruptcy (see below). In some instances, filing a Chapter 13 bankruptcy may the only possible bankruptcy alternative. Because every situation is different, it is important that you consult with a Maryland Bankruptcy Attorney to discuss your individual circumstances before making the decision to file for Chapter 7 bankruptcy.
Who Should File for Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is commonly filed in situations in which an individual owes a large amount of debt, does not own a home and has few non-exempt assets. Examples of circumstances where Chapter 7 bankruptcy may be appropriate include instances where:
You owe a large amount of credit card debt and medical bills that cannot be repaid within a reasonable period of time
- You earn just enough income to cover living expenses, with no money left to pay off any outstanding debts
- You do not have a home, vehicles or large amounts of cash or personal assets
- You have a home or vehicle but there is little or no equity in that home or vehicle after you take your exemption entitlement
Who is Eligible for Chapter 7 Bankruptcy?
Individuals, partnerships, sole proprietorships and corporations are all eligible to file for Chapter 7 bankruptcy protection. However, this form of bankruptcy is most commonly filed by individuals.
To be eligible for Chapter 7 bankruptcy, you must meet the following requirements as a minimum:
- You must have your residence, domicile or place of business in the state where you file
- You must have had no prior bankruptcy filing dismissed for cause within the past 180 days
- You must have had no prior discharge under Chapter 7 bankruptcy within the past eight years
Additionally, for an individual to be eligible for Chapter 7 bankruptcy, he or she must pass the “Means Test,” one of the new bankruptcy rules passed in 2005. This test first determines whether a debtor’s average monthly income is at or less than the median family income for a family of comparable size in your state for the six month period prior to filing for bankruptcy. If your income meets this requirement, then you may be eligible to file for Chapter 7 bankruptcy, depending on other factors.
If, however, your household income exceeds the relevant median family income, a more complicated analysis must be performed to determine eligibility. This analysis involves incorporating living expenses to determine whether the debtor’s income is low enough to qualify for Chapter 7 bankruptcy. If a particular debtor does not qualify for Chapter 7 bankruptcy under the means test, he or she may still file for bankruptcy under Chapter 13 of the Bankruptcy Code.
How Does Chapter 7 Bankruptcy Work?
Filing the Chapter 7 Bankruptcy Petition
The Chapter 7 bankruptcy case begins with the filing of a petition with the bankruptcy court. This petition must be filed in the jurisdiction where you have resided for the greater part of the past 180 days. The petition must include a list of all creditors and the amount due to each creditor. In addition to the petition itself, Chapter 7 debtors must also provide the following to the Bankruptcy Court:
- Schedule of assets and liabilities
- Statement of financial affairs
- Schedule of income and expenditures
- Schedule of executory contracts and unexpired leases
- Schedule of exempt property
Debt Counseling and Additional Requirements in Consumer Bankruptcy Cases
Consumer debtors (as opposed to business debtors) have additional filing requirements. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), consumers facing Chapter 7 bankruptcy must pass a one-session credit counseling program in order to qualify for filing for bankruptcy.
Counsel for the Debtor must then file a certificate of completion for the credit counseling with the Bankruptcy Court. Consumer debtors must also file the following documents with the Court:
- Evidence of income from employers
- Results of the “means test” as stated above
- Affidavits of compliance with local rules
While the bankruptcy case is pending, you must also complete an approved financial management course, which must also be filed with the Court in order to get your Final Discharge.
Automatic stay is the legal term for the cessation of debt collection actions against a debtor during a bankruptcy. This stay is what will end all of those awful, relentless and harassing collection calls you might now be receiving. Also, during this period, creditors may not initiate or continue lawsuits against you, or garnish your wages. Automatic stay arises as soon as the bankruptcy petition is filed. While automatic stay does not apply to all actions, it generally arises in most situations.
Providing Notice to the Relevant Creditors
Once the bankruptcy petition is filed, notice must be given to all creditors listed in the bankruptcy petition. Twenty to forty days after the petition for bankruptcy is filed, a meeting of the creditors must be held, during which time you and your attorney will meet with a Court-appointed trustee. You will be asked questions about your income, assets and liabilities, as listed in your petition. Unsecured creditors have 60 days after the meeting of the creditors to file their claims with the court, should they choose to do so. In a Chapter 7 bankruptcy filing, most creditors do not file a claim.
Appointing a Trustee
Immediately after the bankruptcy petition is filed, the Bankruptcy Court appoints a trustee to oversee the case determine if there are any non-exempt assets. The trustee has a duty to sell the debtor’s non-exempt property at fair market value in order to maximize the amount repaid to the creditors, or, in the alternative, to request an equal sum of money from the debtor. The trustee also has the ability to set aside preferential payments made to creditors within 90 days prior to filing for bankruptcy and to disregard any security interests that were not perfected under state law. If the debtor has no assets to liquidate, the trustee files a “no asset” report with the Bankruptcy Court, requesting that any the debtor’s unsecured debts be forgiven.
The Discharge of Debt
After the trustee liquidates all non-exempt assets, or makes an arrangement with the debtor for an equal sum of money (or files a “no asset” report with the court), the trustee distributes the sale proceeds to the creditors, if there has been a liquidation of any assets. Each creditor is placed into a class of claims under § 726 of the Bankruptcy Code. Essentially, each class of creditors must be paid in full before the next class is paid.
Creditors have 60 days following the creditors meeting to challenge the debtor’s right to discharge of that creditor’s particular debt. But do not be overly concerned. As your bankruptcy attorney will advise you, there are very specific and limited circumstances under which an unsecured creditor can challenge a discharge of the debt owed to them. If a particular creditor does challenge your right to a discharge, that creditor will file what is called an adversary proceeding, and the court will make a determination as to whether or not that debt is entitled to be discharged. If no such challenges are made, your obligations are discharged approximately four months after the bankruptcy petition was filed.
What Debts are Not Dischargeable through Chapter 7 Bankruptcy?
Most debts are dischargeable in bankruptcy. However, certain debts are not dischargeable in Chapter 7 bankruptcy. These debts typically include:
- Secured debts
- Student loans
- Most federal, state and local tax deficiencies
- Government fines and penalties
- Criminal restitution
- Alimony and child support payments
If Chapter 7 Bankruptcy is the Right Option for Me, When Should I File for Bankruptcy Protection?
If you and your attorney determine that Chapter 7 bankruptcy is the best option for you, it is important that you file your case in a timely fashion. As mentioned above, an automatic stay arises once you file a petition for bankruptcy. This protects you from foreclosure, the garnishment of your wages, repossession or any other collection activities during the bankruptcy proceedings. Filing for bankruptcy will allow you time to breathe while the bankruptcy trustee communicates with your creditors.
Bankruptcy can be a difficult decision, and you should not have to face it alone. If you contact us for assistance, we will provide you with a free initial consultation, during which time we will discuss your circumstances and recommend a course of action. If you are considering bankruptcy, contact a Maryland Bankruptcy Center attorney today!
Serving Clients in: Baltimore, Columbia, Glen Burnie, Towson, Annapolis, Pasadena, Rockville, Silver Spring, Laurel, College Park, Frederick, Ellicott City, Upper Marlboro, Landover, Lanham, Severn, Severna Park, Dundalk, Essex, Timonium, Catonsville, Brooklyn Park, Owings Mills, Reisterstown, Westminster, Eldersburg, Sykesville, Burtonsville, Odenton, Hanover, Prince George’s County, Howard County, Baltimore County, Montgomery County, Anne Arundel County, and Frederick County.
For your FREE consultation contact the Maryland Bankruptcy Center today at (410) 766-4044, (301)-587-8900, (877)-549-0888 or use our contact form.