Chapter 7 Bankruptcy
The Fastest Track to a Fresh Start
For most people, Chapter 7 bankruptcy is the quickest and simplest way to discharge burdensome debts and get a fresh start. From start to finish, the Chapter 7 bankruptcy process is usually over and done in less than six months.
A Liquidation process
In theory, chapter 7 bankruptcy is a liquidation process where the chapter 7 trustee takes possession of your non-exempt property, sells it, and then uses the cash proceeds to pay your creditors. In practice, however, much or all or your property is exempt or subject to liens or mortgages, so in the usual chapter 7 case the debtor does not actually give up any property at all. This is very different from a chapter 13 case, where you keep all your property, exempt or not, but make monthly payments to repay some or all of your creditors. Click here for more information on chapter 13.
Exemptions – property you get to keep
The federal bankruptcy code and your state’s laws create a scheme of “exemptions” which entitle you to protect many kinds of property from liquidation. For example, Massachusetts residents can exempt up to $500,000 of equity in their home and up to $7,500 of your car, in addition to lots of other kinds of property. Another whole different scheme of exemptions under federal law is also available, but you must elect one scheme or the other. An experienced Massachusetts bankruptcy attorney will help you choose the scheme which works best for you. In most cases, you can exempt all your property, but if not, we can help you explore other options, such as a Chapter 13 plan which allows you to keep all your property. Click here for more information on exemptions.
Immediately upon the filing your case, the Bankruptcy Court issues an “Order for Relief” which bars all your creditors from taking action or continuing any actions they have already begun to collect on their debts. All pending or threatened foreclosures, repossessions, attachments, wage garnishments, phone calls, letters, billing notices, and even payment orders from other courts are stayed. Only when special circumstances exit can a creditor seek permission to proceed, such as where the mortgaged property has no equity to the debtor. Thus, in the case of some “under water” mortgages, Chapter 7 can only temporarily stay a foreclosure, and cannot permanently stop it, although in many cases the automatic stay provides enough time for the debtor to work out other solutions. In the case of most creditors, the automatic stay is the end of all collection efforts. Click here to learn more about the automatic stay.
Regardless of whether your creditors get anything from the liquidation of your property or not, at the conclusion of your case, you are granted a discharge from the Bankruptcy Court. The discharge is an order releasing you from any further personal obligation to pay discharged debts. There are limitations to the discharge, however, and not every debt is discharged, and not every debtor is discharged. For example, child support, alimony, some kinds of taxes, and student loans are not discharged. Click here for more information on what kinds of debts are dischargeable. You may also be denied a discharge if you conceal property, make false entries in your petition, or are untruthful during the process. An experienced Marlborough bankruptcy lawyer will guide you through the process and avoid such consequences.
To qualify under Chapter 7, you must have resided in the jurisdiction for the past 180 days (otherwise, you may be required to file in the jurisdiction where you last lived.) If you filed another bankruptcy petition that was dismissed within the prior 180 days, you may be restricted from filing again. And, if you received a discharge in an earlier bankruptcy proceeding within the last 8 years, there may be other restrictions. Finally, you must pass the “means test” in order to be eligible to file under chapter 7. Generally, if your household income is below the average for your state, you will pass the means test. And, even if you are above the state average income, you can still file under chapter 7 depending on whether you have enough disposable income to pay your creditors over time. If you don’t qualify for chapter 7 under the means test, generally you can still file a chapter 13 petition. Click here for more information on the means test.
How a Routine Chapter 7 Case Proceeds
Before filing, you must complete a pre-bankruptcy briefing course from an approved provider. These courses can be completed in person, over the phone or online. Most people take the online course which takes about an hour and a half and costs about $35.
The chapter 7 case then formally begins with the filing of a petition with the bankruptcy court in your area. In addition to the petition, you must also file: (1) schedules listing all your assets and liabilities; (2) schedules listing all your income and expenses; (3) a statement of financial affairs; and (4) several other forms.
Immediately upon filing, the bankruptcy court appoints an officer who will serve as your chapter 7 trustee; and then notifies all your creditors who are then bound by the automatic stay and must stop all collection activities.
The court schedules a meeting of your creditors which takes place about 4-6 weeks after filing, called the “section 341 meeting” and which you must attend. Your experienced Marlboro bankruptcy lawyer will help you prepare and will attend with you.
About two weeks before the 341 meeting, you must deliver a copy of your last tax return and 60 days of pay stubs to the chapter 7 trustee. You must also cooperate if the U.S. Trustee or the chapter 7 trustee requests additional information.
The 341 meeting takes place in a large conference room, not a courtroom. The chapter 7 trustee presides and will place you under oath and ask you questions about your petition. All of your creditors are notified of the meeting and invited to attend, but in practice few if any actually show up.
After the 341 meeting, there are two important deadlines, which usually occur 45-60 days after the 341 meeting. Your creditors, the chapter 7 trustee, or the U.S. Trustee may file an objection to your discharge if they believe you are not eligible or have committed misconduct; and your creditors may assert a claim if they believe their debt is non-dischargeable. In most routine cases, however, these deadlines pass without fanfare.
Also, after the 341 meeting, you must complete a second credit counseling course, called the “Financial Management Course,” and file the certificate with the court.
Finally, about 3-4 months after the 341 meeting, the court will issue a discharge and then an order closing the case.
What will bankruptcy do to my credit score?
Credit reporting agencies are permitted to report bankruptcy filings for ten years. Exactly how this will affect your individual credit score is difficult to predict, however, in most cases people find their credit score improved a few short years after bankruptcy. This is because credit scores place much weight on many delinquent accounts; and after bankruptcy most or all of these delinquent accounts are gone from your report. And, the bankruptcy itself is given less weight as time goes by. So, in the long run, filing bankruptcy is usually a quicker route toward improving your credit score as opposed to wallowing in debt and struggling to make minimum payments for years.
Will I be able to borrow after bankruptcy?
Yes and no. Since you are no longer obligated to pay other debts, you actually become a more attractive candidate for many lenders. Your disposable monthly income is no longer “spoken for” by prior loans, so to speak. That is not to say you will instantly qualify for a new car loan. The bankruptcy will weigh heavily on your credit score for many years. But there are merchants and lenders who have programs for “C” credit customers. Many auto dealers have “recourse” loan programs for customers with prior bad credit or recent bankruptcies; and there are many banks with secured credit card programs. You will pay higher interest rates because the risk is greater to the lender, but in most cases, the credit is available.
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