Chapter 7 Bankruptcy
Chapter 7 provides immediate relief for people struggling with unsecured debts such as medical bills, credit card debts, guaranteed business debt and certain tax debts. Immediately after filing your Chapter 7 case, all collection activity from creditors will be stopped by what is known as the automatic stay. This “stay” operates to do just what it implies, to “stay” any collection activity against you once your case is filed. Approximately four months after you file your case, you will receive a Chapter 7 discharge, which will release you of any personal liability on most debts and prevent creditors from contacting you in the future regarding those discharged debts.
The Means Test – Am I Eligible To File Chapter 7?
The 2005 amendments to the Bankruptcy Code brought new challenges to taking advantage of the Chapter 7 discharge. The “Means Test” is the test to determine whether the Debtor has the means to pay his debts. If your income falls below the median income for the state in which you reside, you are automatically presumed to pass the means test and are eligible to file bankruptcy. If you make above the median income, I can help you overcome the presumption that you are ineligible to file by deducting certain costs and payments to show that you should be eligible to take advantage of the Chapter 7 discharge rather than being forced into a Chapter 13 repayment plan. If you have primarily business debts, then the means test does not apply, and you can file a Chapter 7 regardless of your income level.
How Does the Means Test Work?
The Means Test works the same everywhere you may file your Chapter 7 case, whether it be Atlanta, Georgia or anywhere else in the country. It is a complex formula that considers your income compared to the median income for other households of your size in the county where you live. There are two possible outcomes for the Meanst Test:
- A Presumption of Abuse Arises or,
- A Presumption of Abuse Does NOT Arise.
We begin the means test by determining your household size. The “rule of thumb” for household size is “heads on beds – or how many people live in your house (excluding roommates and non-dependents). Even college age children can be dependents if they still live at home, though any income they bring into the house will be considered. After determining the household size, we look at the GROSS income for debtor, debtor’s spouse, and any other members of the household for the past SIX MONTHS. This is designed to capture a nice monthly income average, especially if you receive bonuses at certain times of the year.
If your household’s average income for the past six months is below the MEDIAN INCOME for the county where you live in Georgia, then you pass the means test, and the presumtpion of abusing the bankruptcy code does not arise. But if your income is ABOVE the MEDIAN INCOME, you are presumed to abuse the bankruptcy code and must consult with an experienced bankruptcy attorney to see if certain deductions can be taken to overcome that presumption.
FORECLOSURE AND REPOSSESSION
One of the most common questions I receive is whether filing for bankruptcy will save your house or car from foreclosure. The answer is: “it depends.” While an imminent foreclosure or repossession will be prevented upon filing, unless you plan to reaffirm the underlying debt (enter into a new agreement with your house or car lender to agree that your mortgage or car loan will not be subject to discharge), a creditor will ultimately have the right to foreclose on your home prior to case closure through the filing of a motion for relief from the automatic stay. This is a fact that most attorneys will not let you know up front. If you cannot afford to keep your house, then Chapter 7 will not help you. Those who wish to keep their homes and cars should consider filing a Chapter 13 case instead. If you are current on your secured debts (house and car) and can either pass the means test or have primarily business debts, then Chapter 7 may be your best option.
THE PLAYERS IN BANKRUPTCY
There are five important groups of people you need to be aware of in your Chapter 7 bankruptcy case.
1. The Chapter 7 Trustee: The person tasked with taking inventory of your assets and liquidating any non-exempt property for the benefit of creditors. The Trustee is not a court or government employee, but an individual appointed by the U.S. Trustee to administer your case. The Trustee gets paid a flat-fee of $60 (taken as a part of the filing fee) and makes money by liquidating your assets. Most cases are what we call no-asset cases, meaning that there are no assets that can be taken from you to sell for the benefit of your creditors.
2. The Debtor: This is you.
3. Your Attorney: The lawyer you choose to represent you in your bankruptcy case.
4. The Judge: The man or woman in the shiny black robe. The Judge is there to decide any disputes that cannot be agreed to between the Trustee, any creditors, and the Debtor. You will most likely never meet a bankruptcy judge.
5. Your Creditors: You owe these people money (although we can object to a creditor’s claim if grounds exist to do so), and they will be represented by their own attorneys.
KEEPING YOUR STUFF IN BANKRUPTCY
One of the most common misconceptions about Chapter 7 bankruptcy is that you will lose all your property. This is simply not the case. You can even keep your house and car under certain circumstances. Most of your household property is exempt from creditor collection efforts by law. These laws are called the Georgia “Exemption” statutes. By taking advantage of these “Exemptions”, I can protect your property from being liquidated by the Trustee.
This is one of the more complicated areas of bankruptcy law and the prime reason why people who decide not to seek the counsel of an experienced bankruptcy attorney regret filing bankruptcy. Your Chapter 7 trustee is generally only interested in a few types of assets: houses with substantial equity, luxury cars with substantial equity (very rare), cash in deposit accounts, and publicaly traded stocks. Most of my clients, including those with six figure incomes, do not enough equity in their houses or cars for a trustee to sell and do not have cash or money in deposit accounts over what we can exempt under Georgia law.
Not All Debts Can Be Discharged in a Chapter 7
While filing a Chapter 7 bankruptcy can wipe out a majority of the debts you owe, there are certain debts that cannot be eliminated in bankruptcy. Knowing which debts are and are not dischargeable will prevent you from making the mistake of filing (or not filing) bankruptcy. For instance, many people falsely believe that medical debts cannot be wiped out by filing a Chapter 7 in Atlanta. This is simply not true. Medical debt is the second highest cause of Georgians filing bankruptcy, and the underlying medical bills are absolutely dischargeable.
Debts That Survive Your Bankruptcy
When I talk about debts that survive bankruptcy, I am referring to debts that you will still be obligated to pay after you receive your discharge. Here is a list of debts that are NOT dischargeable in bankruptcy:
1. Debt resulting from a DUI judgment.
2. Criminal Fines.
3. Certain taxes (though some tax debts can be wiped out).
4. Debt incurred though fraud.
5. Domestic Support Obligations (child support or alimony).
6. Student Loans (there is a hardship discharge, but the bar is so high regrading the burden of proof that virtually nobody has been successful in claiming a hardship discharge).
7. Judgments obtained where the underlying tort was an intentional and malicious act.
8. Debts incurred within 90 days of filing for a luxury good or service.
The Chapter 7 Filing Process
Filing Chapter 7 bankruptcy is the quickest way to obtain a fresh start on your life. Unlike Chapter 13, Chapter 7 is a financial snap-shot of your life, and all debts arising before that snap-shot in time are wiped out.
Immediately – Meet with your attorney for a free consultation to discuss your situation. If you think you may need the help of a bankruptcy attorney, please do not hesitate to take advantage of a free case evaluation, as the timing of your petition has substantial consequences.
Within Days – You will receive a questionnaire to fill out, which must be filled out completely, as the bankruptcy code requires all of this information prior to filing. You will also need to complete your pre-bankruptcy credit counseling requirement with a U.S. Trustee approved agency. Don’t worry, these are very plentiful, and we can give you recommendations.
Within 10 Days – File your bankruptcy petition. After you have filled out the appropriate paperwork and hand-delivered, emailed, or faxed the appropriate documents to us, I will prepare your petition and file it with the court.
30 Days After Filing – You and your Atlanta bankruptcy attorney will attend the “341” Hearing together. This is a low-stress meeting, and likely the only time you will have to go to court. You will meet with your attorney, the Chapter 7 trustee, and any creditors that choose to show up. Creditors rarely attend this meeting, and it rarely lasts more than 5-10 minutes while you are being questioned.
60 Days After Filing – If you have any debts you wish to reaffirm, this is the time to do it. Reaffirming a debt means signing a new agreement with a creditor providing that you will still be obligated to the creditor after you receive your discharge. This is a completely voluntary agreement, and there are only a few reasons to file a reaffirmation agreement.
90 Days After Filing – Within 90 days of filing, you will be requires to complete your second credit counseling course. Again, this will not take but a little of your time and can be completed online.
90 – 120 days After Filing – Congratulations! You have probably received your bankruptcy discharge and your case is closed.
Credit After Filing Chapter 7
Your Chapter 7 will be listed on your credit report, depending on the agency, for 7 to 10 years. But it will only affect your credit for 2-4 years. In other words, filing bankruptcy is a one time event, just like making a late payment, and it will be listed on your credit report for creditors to see for a certain time period. I’ve had clients increase their credit score from 490 to 710 within 2.5 years after filing. While there is no guarantee of how your credit score will perform, if you pay all your bills on time after filing bankruptcy you have a great shot at being able to buy a house or car at a low interest rate within 2 years. Also remember that you cannot file another Chapter 7 for 8 years, so you are actually a lower credit risk to lenders than you were before you filed bankruptcy.