Beginning October 17, 2005, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you must qualify using a "means test" for Chapter 7 bankruptcy. The "means test" is how the Internal Revenue Service will determine who can or cannot file for Chapter 7. Your income and expenses are examined in detail to see how they compare to the standard for your area as set by the IRS. If your income from the last six months is greater than the median income and you can pay at least $6,000 over five years or $100 a month toward your debt, you are not allowed to file for Chapter 7 but must file for Chapter 13 instead. Chapter 13 will require you to repay a portion of your debts over three to five years.
A part of the means test requires that you file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.
Under the new law, when you file for bankruptcy you must receive approved credit counseling and a budget analysis, at your own expense. Credit counseling should address the means test calculation for you. You can also find mean test calculators on the internet. The new law also increased the amount of time you have to live in the state before you are eligible to use that state's exemptions. This was to prevent a debtor from moving to a state with more generous exemptions just prior to filing for bankruptcy.
Most chapter 7 cases are "no-asset" cases, which simply means that you do not have any non-exempt property for the trustee to sell. At the time that you file your petition for bankruptcy, you declare whether your case is "asset" or "no-asset" and the burden is on the trustee to change the designation.
Eligibility for Chapter 7
Filing Chapter 7
A bankruptcy starts with the filing of the official petition, schedules and Statement of Financial Affairs with the bankruptcy court. In order to complete the Bankruptcy Forms, you must provide a list of all of your creditors and the amount and type of their claim; the source, amount, and the frequency of your income; a list of all of your property; and a detailed list of your monthly living expenses.
As soon as you file for bankruptcy, your creditors are prevented from trying to collect on your debts through what's called an "automatic stay." The stay is designed to preserve your property and to give you a break from litigation.
A creditor must show the bankruptcy judge, after a hearing, that there is "cause" for the creditor to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy period).
If there is property that isn't exempt, the trustee takes control of it. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims. Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.
Usually between 20 and 40 days after you file your petition, the trustee will hold the "first meeting of creditors" (also called a "341" meeting). You must be present for that meeting. The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do.
Generally, the only responsibilities you have with respect to the bankruptcy after the 341 meeting is to cooperate with the trustee in providing any requested information.
Creditors have 60 days after the 341 meeting to convince the bankruptcy court you shouldn't be allowed to jettison your debts.
Creditors may also approach you about what's called "reaffirmation" of debts. Reaffirmation is an agreement between you and a creditor that you will remain liable on a debt and will pay the remaining portion of the amount owed in order to keep certain property, such as an automobile, even though the debt could be discharged.
Under the old bankruptcy law, you could make your car payments when they came due. When the loan was fully paid, title to the car would be transferred to you. If you defaulted on the loan after discharge, the creditor could repossess the car, but the repossession deficiency amount that you owed would still be wiped out and you would owe nothing. Under the new law, you have to reaffirm your car loan within 45 days after the "341 meeting." You no longer have the option of continuing your car payments without reaffirming the loan. Once the loan is reaffirmed, if you default on your payments and the car is repossessed, you are liable for the repossession deficiency.
You also have the option to redeem the car within 45 days of the "341 meeting." This means that you have to pay the entire balance due within that time. Because most debtors do not have that kind of money, this option is rarely used.
If you decide to reaffirm a debt, you are required under the Bankruptcy Code to file an agreement with the court. The agreement must disclose that you were advised of the amount of the debt you are reaffirming and how it was calculated and that you are aware that the debt will not be discharged. You must indicate your income and expenses so that the court can see that there is sufficient money to pay the reaffirmed debt. Unless you are represented by an attorney, the court must approve the agreement. A hearing will be held if the court disapproves. If an attorney represents you, he or she must certify in writing that they advised you of the legal consequences of the agreement, that you were fully informed and entered into the agreement voluntarily, and that the reaffirmation will not create an undue hardship on you and your family.
Unsecured creditors may offer deals for new credit based on reaffirming the existing balance on your credit card.
The trustee may review your income and expenses to see if you have enough money left after your current living expenses to pay something to creditors.
If creditors haven't filed a suit to stop you from getting out from under your debts within 60 days of the 341 meeting, the court will enter an order granting the "discharge" of all dischargeable debts that existed on the date the case was filed.
What debts are discharged in Chapter 7?
Dischargeable: Personal loans, Credit cards, Repossession deficiencies, Auto accident claims, Judgments, Business debts, Leases, Guaranties, Negligence claims
Possibly Dischargeable: Property settlements or division of debts in divorce, Willful and malicious injuries to others, Embezzlement Debts incurred by fraud or dishonesty, Debts arising from breach of fiduciary duty
In order for these debts NOT to be discharged, creditors must ask the court to make a determination about them. Without a request from the creditor and a granting of that request by the court, these types of debts will be discharged.
Not Dischargeable: Recent taxes, Trust fund taxes, Child or family support, Criminal fine or restitution, Auto accident claims involving intoxication, Debts not scheduled, Penalties payable to the government other than tax penalties Student loans, Debts listed in prior bankruptcy where debtor was denied a discharge
It is extremely important to note that Chapter 7 will not stop a repossession or foreclosure because the failure to make payments or pay off any arrears that are due will relieve the "automatic stay" and allow the repossession or foreclosure to proceed. Only Chapter 13 can delay a foreclosure but the payment obligations under that chapter are extensive.
You'll want to take your time in deciding whether Chapter 7 bankruptcy is for you. Under the new law, you are prohibited from filing for 2 years after the dismissal of a case, so choosing the wrong time to file or the wrong way to file can ruin your chances of filing again when it is absolutely necessary. If you choose wisely, it can be a quick, efficient way to get a fresh financial start.
A bankruptcy does not wipe out voluntary liens, like mortgages and deeds of trust, or tax liens. So the lender still has the right to foreclose if you do not pay. If you pay, everyone is happy. Remember, the lender does not want the property; it wants you to pay regularly on the loan. Foreclosure is a last resort for the lender if it concludes it can't get the owed money any other way.