What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a legal proceeding under the Federal Bankruptcy Code where the debtor seeks relief from his or her debts. Under Chapter 7 proceedings, the debtor must turn over all his or her nonexempt property (more on this below) over to a court-appointed trustee who then sells the property and distributes an equal share to the debtor’s creditors. In return, the debtor typically has all outstanding debts forgiven (with a few important exceptions which are noted later).

Chapter 7 bankruptcy is a fairly streamlined process, when handled correctly. It involves a flat fee to your attorney, a court filing fee, two educational classes, one administrative hearing, and then – if everything goes smoothly – a discharge of your debts. It is usually the least expensive and most convenient of the two commonly used chapters of bankruptcy. Most people – when they think bankruptcy – are thinking of Chapter 7.

Who Legally Qualifies for Chapter 7?

People have a Constitutional right to file bankruptcy under Article I, Section 8 of the US Constitution – authorizing Congress to enact “uniform Laws on the subject of Bankruptcies.” This is not a right you can contract-away. Regardless of what a collection agent or your loan agreement may tell you – you have a right to file for bankruptcy under the laws set forth by Congress.

Any individual residing, domiciled, or having property or a place of business in the United States may file a Chapter 7 bankruptcy (11 U.S.C. 109). Under the new rules, you must complete a Credit Counseling Course prior to filing bankruptcy (I will recommend an authorized provider once we get started). If you have filed for Chapter 7 bankruptcy in the last 8 years, you might not qualify for a new one immediately. Call me for more details if you are unsure of the time frame on a repeat filing. If you are too close in time to your last Chapter 7, you may need to file Chapter 13 instead.

If you meet the residency requirements, and have not filed for Chapter 7 in the last 8 years, the main question becomes whether your income qualifies for Chapter 7 bankruptcy or not.

In 2005, Congress passed the “Bankruptcy Abuse Prevention and Consumer Protection Act.” The Act was passed because Congress was concerned that people with higher income, and an ability to pay at least some of their debts, where inappropriately filing for Chapter 7 bankruptcy. In response, Congress added to the bankruptcy process, a “Means Test.”

Essentially, what this means is that if you are making too much money, you might not qualify for Chapter 7 bankruptcy. The cut-off point is measured according to the most recent Census Bureau figures showing the median income for a household of your size (household size can be determined in several different ways – contact me if you need further details on this subject). If your household is below median, you will generally pass the Means Test. But if it s above, you may be required to file a Chapter 13 instead – unless you can demonstrate a lack of ability to pay a Chapter 13 plan on a monthly basis.

For more information on the Means Test, and the Census Bureau figures, please visit the Means Test section of the US Trustee website.

What if My Income is Too High?

If your gross household income exceeds the Census Bureau’s listed median, don’t panic yet. It is still possible to qualify for Chapter 7 if you can demonstrate that there would be no excess income available to fund a Chapter 13 plan.

There are a lot of household expenses that can be deducted to determine your ability to fund a Chapter 13. Examples would be taxes, qualified payroll deductions, home-business expenses, car expenses, insurance, food, clothing and housing, and so forth. I am acquainted with all the possible deductions that can be made in your case (some of them may surprise you), and after being hired, can run a full Means Test analysis on you case to determine if you can take advantage of these deductions to qualify for Chapter 7 in spite of a higher than average gross household income.

Warning:
The Means Test is not something you should attempt on your own. There are a great many technicalities involved in claiming the proper deductions – and new rulings are being issued by the Federal courts all the time impacting how these deductions are to be interpreted and applied. Attempting a full Means Test without a qualified lawyer runs the risk of the United States Trustee challenging your fitness for Chapter 7 – and the lack of an attorney can and does make debtors a more attractive target for aggressive action from the US Trustee.

Will I Lose Any of My Property?

As I mentioned earlier, Chapter 7 bankruptcy discharges your debt, but in return it requires you to turn over any valuable non-exempt property to a Trustee to be distributed to your creditors and pay of perhaps some of your debt. Does this mean that you will lose some of your property?

Actually, in most of my cases, my clients do not lose ANY property at all.

The hard reality of bankruptcy is that most debtors filing for Chapter 7 bankruptcy do not have a lot of valuable property to begin with. And what they do have is usually completely protected by the applicable Bankruptcy Exemptions, and therefore, unavailable to their creditors.

For most of my clients in Colorado, the Colorado Bankruptcy Exemptions will apply. These are found in the Colorado Revised Statutes 13-54-102. They protect anything from household furniture, appliances and electronics, to automobiles, to home equity, to life insurance proceeds, to jewelry, to tools of your trade or business. Many popular investment vehicles such as IRAs or 401Ks are also completely exempt in most instances. This means that they are not available to your creditors in a bankruptcy and you can keep them.

Other assets however, are not protected, and you will need to consult with your attorney carefully to determine whether you have non-exempt assets, and what you can do to minimize your exposure.

For my clients who have only recently moved to Colorado, another state’s exemption scheme may apply instead. These can sometimes be far more generous than Colorado, or far less generous – it all depends on what the respective state legislatures decided should be protected. If no state’s exemptions apply to you, you may be required to use the default Federal Exemptions included in the Federal Bankruptcy Code instead. Determining which exemption scheme applies to you is a complex matter that you will want me to look into.

If an asset is not protected by law, then the appointed Chapter 7 Trustee can demand it from you at your 341 Meeting of Creditors. You then would be required to either relinquish the actual asset, or pay off its value to the trustee. My job is to avoid or minimize this scenario as much as legally and ethically possible. Call me for further details.

How Long Does This Whole Thing Take?

There are three important milestones in your bankruptcy process: 1) when you file; 2) your 341 Meeting; and 3) your official bankruptcy Discharge.

The filing of Chapter 7 bankruptcy is what puts the bankruptcy protections into force and protects you from things like collection calls, garnishments, and foreclosures and the date it happens is largely under your control. Under my process, you and I determine the best filing date together. If everything goes well and without delay, you can be looking at a filing date in as little as two weeks from the time you first call me by phone. Faster, if we have an emergency situation. But we may determine together that a later filing date is appropriate, for various reasons.

Once we file, you will be automatically assigned a date for your 341 Meeting. This is sort of like your day in court (though no bankruptcy judge is present). You must be physically present for this meeting and it is usually automatically calendared by the court about one month out from the date you filed (this is only an estimate).

It’s hard to say exactly when a Chapter 7 bankruptcy will conclude in a successful Discharge Order. It depends on how long the Bankruptcy Court takes to process your case, how long the Chapter 7 Trustee spends on your case, whether the court fee is paid in a timely fashion, and so forth. But on average, it takes about 2 months from the 341 Hearing.

All told, the average bankruptcy takes an estimated four or five months from the time you contact me, to the time of the Discharge.