(For more bankruptcy info. see my websites at: www.farquharlaw.com and www.freshstartsandiego.com. Or call (619) 702-5015 to ask any bankruptcy question without charge!)
What is a chapter 7 bankruptcy?
A chapter 7 bankruptcy is called the “straight bankruptcy” because you file, go to a hearing and get a discharge from your debts in 90 days. It is quick, clean, fast, and it is the bankruptcy that the vast majority of people choose to file when they need a bankruptcy. This contrasts with the very complicated chapter 11 and the chapter 13 payback plan.
Chapter 13 or chapter 7?
Chapter 13 bankruptcies and chapter 7s are very different bankruptcies bur both have advantages and disadvantages. A chapter 7 is good because it is clean and fast. It discharges debts quickly. It is all over in 90 days and you can then go on with your life if you qualify for the chapter 7. Not everyone does qualify though.
Some people are “means tested” out of a chapter 7 because they make too much money to file one. They have disposable income and thus bankruptcy law says that they must therefore file a chapter 13 bankruptcy if they want to file one at all. (They would also qualify for a chapter 11 but that is another story).
Others don’t qualify if there is too much equity in their home. In a chapter 13 they could then keep the home and continue to make payments on it in the 13. One must always be careful that you do not violate the “best interests of creditors test”. This is where the creditors have the right to demand that they get as much in a chapter 13 as they would in a chapter 7 liquidation.
The 13 differs from the 7 in that it is a payback plan where the debtor makes payments to the trustee for from 3 to 5 years. In this period the debtor pays back some or all of his debts. Most plans pay only a percentage of the debts but some do pay back 100%. After the payback period is over then the unpaid debts (if there are any) will be discharged.
But why pay back the debts if you can discharge and escape them? There are many reasons and one is the income limits of a 7 discussed above. If you exceed these income limits then you cannot file a 7. Debtors also file chapter 13s to take advantage of the lien strip and the cramdown.
The cramdown allows you to write down loans to the value of the property and is useful if you have property that is underwater. The lien strip allows you to strip off or eliminate a second mortgage on a home if it is completely unsecured. So if you have a home that is worth less than the first mortgage then the entire second mortgage can be eliminated after the 5 year payment plan is over.
Both of these cannot be done in a chapter 7 and if you want a cramdown or a lien strip then the chapter 13 is your chapter. If your income is too high then a chapter 13 also makes sense. There is one more advantage though to a chapter 13. It can be dismissed by the debtor at any time. Once you file one you are not locked in like you are with a chapter 7.
The disadvantage though is that you are locked into paying a trustee for a period of five years if you want to complete the plan and get a discharge. Most chapter 13 fail because people can’t make these regular payments for five years to a trustee. According to one article I read as many as 92% of them fail and are dismissed or converted to a chapter 7. This is a very high fail rate and this is the reason why most people file chapter 7s.
You can pay a chapter 13 bankrupty off early though if you have the money. So if you payments are $300 per month and you are three years in you could pay off the remaining two years early and get out of the 13. Most people though don’t have the money to do this.
You should consult a bankruptcy attorney to see which chapter is right for you.
I am a San Diego bankruptcy attorney. For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com. Or call my office for a free consultation about a chapter 11 bankruptcy or for any other advice about bankruptcy or debt at (619) 702-5015. For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at firstname.lastname@example.org.
Chapter 7 Attorney – Why You Need An Attorney
Do I need a chapter 7 bankruptcy attorney to do my bankruptcy or can I do it alone?
(For an article on what a chapter 7 bankruptcy is see below this article)
I believe that you do need a chapter 7 bankruptcy attorney to file your bankruptcy for you. Bankruptcy filing is a difficult process and it impacts many areas of your life. Filing a bankruptcy is far too complicated to do alone and I believe that you would be much better off with an attorney to assist you for the following reasons:
1) Property- A chapter 7 bankruptcy attorney can help you list, exempt, and save your personal property and your real estate. He or she can determine if you transferred any property recently out of your estate or if any property was transferred to you recently. This makes a big difference for your case. You want to be aware of the fraudulent transfer laws and avoid losing any property in the bankruptcy. In California the trustees can look back four years to determine if they are going to reverse any property transfers (and possibly take your property from you). A chapter 7 bankruptcy attorney can help you to protect your property so it is not taken by the bankruptcy trustee.
2) 341 hearing– A chapter 7 bankruptcy attorney will accompany you to the 341 meeting of the creditors. The creditors rarely show up but the trustee always does. The attorney can prepare you in advance for the hearing and then deal with any issues that arise with the trustee. Also a chapter 7 bankruptcy attorney will invariably have attended many such hearings (if he or she has experience doing bankruptcies) and he or she will know what to expect there.
3) Software and electronic filing– Bankruptcy attorneys that do chapter 7s probably file the cases electronically which is a much easier way to file than the old ”over the counter” way. The software that is used by a chapter 7 bankruptcy attorney to do this is far too expensive for you to buy just for you to do your bankruptcy. With the software a chapter 7 bankruptcy attorney can efficiently and correctly complete your case and file it with the court.
4) Deciding which set of exemptions to use– Deciding which set of exemptions to use in a chapter 7 case may require a bankruptcy attorney to analyze your situation. There are many issues relating to whether you should choose the “703? set of exemption with the “wild card” or the “704? set if you have a house with equity in it that you need to homestead. You must choose between the two and a chapter 7 bankruptcy attorney can advise you of the issues you face as you choose.
5) Download credit reports-Most bankruptcy filing software programs have the ability to download your credit reports into the bankruptcy case. It is a tremendous advantage to have credit reports from all three major credit reporting agencies directly put into your case so there are no mistakes. These credit reports will accurately reflect what these agencies say you owe and the reports will come complete with the dates that you made the various charges to your credit cards. These dates will tell the trustee when you were incurred your debts so there will be no mystery as to how old they are.
You can get these reports yourself and enter the information manually but it is a great advantage to have this direct and efficient system to do it for you. The chapter 7 bankruptcy attorney can then compare that information with your creditor’s bills to make sure that your creditor information is listed in your bankruptcy as accurately and completely as possible.
6) Assistance with the means test– The means test is very difficult to fill out by yourself. It was added to chapter 7 bankruptcies in 2005 to force debtors who earned too much income into a chapter 13. The rational behind the test was that if they had enough extra income then they had the “means” to pay their debts back. A chapter 7 bankruptcy attorney will use the same bankruptcy filing software to help him or her complete your means test and an experienced bankruptcy attorney will undoubtably have worked on many means tests for a number of clients. After examining your situation the attorney can determine if you pass the test and he or she can look to see if there is anything you can do to pass in the future. Also the attorney can make sure that you get the full use of all of your deductions to the means test so you can pass.
7) Representation in court– If something goes wrong with your bankruptcy case or if you need to defend against a challenge to the dischargeability of a debt then you will need a chapter 7 bankruptcy attorney to represent you in court. Only an attorney can represent you in court and a chapter 7 bankruptcy attorney should be familiar enough with the issues to do so. Having an attorney on the case already is a big advantage if things do go wrong and you wind up before a judge.
8) Reaffirmation agreements– You may need to reaffirm your car debt in the bankruptcy if you want assurance that the creditor will not repossess it. In California, according to the Dumont case (decided in the 9th circuit), an auto finance company can repossess you car after a bankruptcy even if you are current on the payments. Many of my clients don’t like this uncertainty and they demand a reaffirmation agreement even if I advise against it. I have often ended up before a judge in bankruptcy court with these cases and the judges seem to not like these reaffirmation agreements. If you have a chapter 7 bankruptcy attorney then you will have someone who can argue for your reaffirmation agreement in court and this gives you a better chance of getting it approved. There are other reasons but these are some of the main reasons why you should use a chapter 7 bankruptcy attorney to file your bankruptcy case. They will facilitate and expedite the process and be by your side when you need them. If he or she is experienced then a chapter 7 bankruptcy attorney can be invaluable to you for filing your bankruptcy. I have seen debtors with no chapter 7 bankruptcy attorney show up at 341 hearings. The often get continuances for not filling out their schedules and means test correctly. Some draw a representative from the U.S. Trustee’s office who also looks over their case and some even get their cases dismissed.
More about chapter 7 bankruptcy
Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 (“straight bankruptcy”, or liquidation). Chapter 7, as with other bankruptcy chapters, is not available to individuals who have had bankruptcy cases dismissed within the prior 180 days under specified circumstances.
In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages and security interests for car loans), survive. The value of property that can be claimed as exempt varies from state to state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debt are legally discharged by the bankruptcy proceeding, but there are various types of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, income taxes less than 3 years old and property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determine the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor. Spousal support is likewise not covered by a bankruptcy filing nor are property settlements through divorce. Despite their potential non-dischargeability, all debts must be listed on bankruptcy schedules.
Bankruptcy discharge stays on the individual’s credit report for up to 10 years for most purposes. This may make credit less available and/or terms less favorable, although high debt can have the same effect. That must be balanced against the removal of actual debt from the filer’s record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness are complex subjects, however. Future ability to obtain credit is dependent on multiple factors and is usually difficult to predict.
Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor’s Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.
It is widely held amongst bankruptcy practitioners that the U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings. Through these activities the U.S. Trustee has achieved a regulatory system that Congress and most creditor-friendly commentors have consistently espoused, i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.
Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only a few of many issues to be considered in determining whether to file bankruptcy. The importance of the effects of bankruptcy on creditworthiness is sometimes overemphasized because by the time most debtors are ready to file for bankruptcy their credit score is already ruined.
Call (619) 702-5015 to speak to a knowledgeable attorney if you have any questions regarding this information.