Chapter 7 Bankruptcy Explained
Chapter 7 is often called “straight bankruptcy.” Upon filing the case, all creditor contact and collection action must stop. The discharge of debt order comes down in about 90 days. Although as a technical matter everything you own becomes property of the bankruptcy estate, the array of exemptions which you can claim in almost every case allows you to keep all of that property at the close of your case.
In order to obtain your discharge of debt – your fresh start – you must disclose in the papers you file everything that you own. You must fully disclose your income and expenses, and you must truthfully answer questions about your recent financial past. With the guidance of an experienced bankruptcy attorney, you will be able to satisfy these legal requirements and obtain the discharge of debt without losing what you own. Douglas Q. Wickham, founder of Wickham Law, has been helping clients in the Raleigh area with bankruptcy cases since 1987. He can answer your questions and advise you on what solution works best for your unique circumstances.
Chapter 7 bankruptcy is the most direct and immediate form of debt relief. Its cost must be paid before your case can be filed, but its total cost is on average about one-third of the cost of obtaining a discharge of debt in a Chapter 13 bankruptcy case. There are situations in which Chapter 13 is a better form of bankruptcy debt relief, but its cost in attorney fees and Trustee commissions is at least three times the cost of the more direct and immediate relief provided in a Chapter 7 bankruptcy case.
Not All Debts Are Discharged
Chapter 7 discharges most debts. Some unsecured debts – primarily school loans, recent taxes, child support and alimony – are not discharged. Debts which are secured by collateral – home mortgages, car loans, etc. – are discharged, but the creditor’s lien on its collateral is not eliminated. Thus you can keep your home only if you are current on your payments and you remain current on your payments after your case is closed. If you are current on your car payments and want to keep your car after your bankruptcy case is closed, you are required to reaffirm the obligation on your car loan during your case.
You do have a choice about this. If you are willing to surrender your car or your home to the creditor, then the entire underlying debt is discharged in your case. So if you owe more than your car or your home is worth, you may wish to move on without the car or home, but also without the debt that is tied to it. If you are behind on your mortgage or your car and wish to try to keep them, then you may choose to file a Chapter 13 bankruptcy case. An experienced bankruptcy attorney can help you make a sound choice between the Chapters.
Chapter 7 And Non-Exempt Property
Most Chapter 7 cases are “no asset” cases. That means that you keep all of your property because it is exempt, and there is nothing for the case Trustee to liquidate and pay to creditors. However, if you do have non-exempt property and you file a Chapter 7 bankruptcy case, you will have to turn over that non-exempt property to your case Trustee so it can be liquidated and a dividend paid to your creditors. Some times a debtor will make this choice – to turn over something not needed or wanted in order to obtain discharge of a larger amount of debt.
If you do have non-exempt property, you can keep that property if you file and complete a Chapter 13 bankruptcy case in which you pay enough into your plan so that the Chapter 13 Trustee distributes to your unsecured creditors as much as they would receive if you had filed a Chapter 7 case. Those creditors are not entitled to any more, and any remaining unpaid balances are discharged at the end of the case. You have, in effect, bought back the non-exempt equity in your property by choosing to file and complete a Chapter 13 bankruptcy case.
The majority of people who choose to file bankruptcy have limited income. To be eligible to file Chapter 7 bankruptcy, your income must either be below the median income for a household of your size and location or, if the income is above that median, you must pass the “means test” calculation which is required under the Bankruptcy Code. If you have a good income, but are still struggling with your debts, you should consult an experienced bankruptcy attorney who can take your information and help you understand whether you are eligible for Chapter 7 bankruptcy relief. Even if you are not, Chapter 13 is available to you and you may well be able to control your creditors and make payment of your disposable income to them through the Chapter 13 Trustee. When you complete your Chapter 13 case, you will receive a bankruptcy discharge of all unpaid balances.
Differences Between Chapter 7 And Chapter 13
Chapter 7 bankruptcy provides relief from debt at a reasonable cost. You obtain the discharge of debt in a few months and can then move forward with your life. In order to obtain the discharge of debt in a Chapter 13 case, you will have to successfully make the required Trustee payments every month for a period of three to five years. There are attorneys who advertise no money down bankruptcy, and if you absolutely cannot save or obtain the money to do a Chapter 7 case you may choose to file a no money down Chapter 13 case. However, this should be your last choice if you are eligible under the means test to file a Chapter 7 case and there are none of the specific reasons in your situation which would cause you to choose the Chapter 13 filing. See Chapter 13 Explained to understand more about these situations.
Wickham Law is a debt relief agency. The firm helps people file for bankruptcy relief under the Bankruptcy Code.