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Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as a “straight” bankruptcy. There is no payment plan. The objective of the Chapter 7 case is to discharge debts, meaning that a court order is entered stating that the debts are no longer legally enforceable by the creditor.
What Debts can be Discharged in a Chapter 7 Bankruptcy?
Debts that are dischargeable include credit card debts, medical bills, personal loans, most lawsuit judgments and other debts. Debts that are NOT dischargeable include child support and spousal maintenance (alimony), criminal fines and restitution, tickets (however, most tickets can be discharged in a chapter 13 case), IRS tax debts for the past three tax years (older tax debts may be discharged if the taxes meet certain requirements), student loan debt unless the debtor can establish an “undue hardship” by filing a separate lawsuit within the bankruptcy case, debts incurred to pay for nondischargeable taxes, debt incurred by fraud, and debts from injury or death while driving while intoxicated.
What is the Basic Process and Objective of a Chapter 7 Case?
An individual files a Chapter 7 bankruptcy to obtain an Order of Discharge. The discharge order is entered approximately three and half months after the case filing. There is one court appearance, known as the 341 Meeting of Creditors. At this meeting creditors can appear to ask questions, though it is rare for a creditor to appear. The bankruptcy trustee will be present to ask at least few questions. The basic questions include whether the debtor has read and signed the documents prior to the case filing, whether the debtor has filed a bankruptcy previously, whether the debtor has listed all of his or her assets and debts, income and expenses, transfers of assets within the past two years and any payments to friends of family members in the past year. The trustee may ask additional questions, particularly if the debtor owns real property, owns a business, has a claim against a third party (such as a car collision, slip and fall injury or other claim), or other issues. After the 341 Meeting of Creditors, the trustee or creditors have 60 days in which to object to the debtor obtaining a discharge or concerning a particular debt.
Can the Bankruptcy Help With Wage or Bank Garnishments or Creditor Harassment?
Yes, when the case is filed, an automatic stay is in force which prohibits creditors from continuing to garnish wages or bank accounts, and creditors must stop all collection activity such as threatening letters and phone calls. The automatic stay will continue to be in place unless a particular creditor files a motion and obtains an order lifting the automatic stay. The most common reasons for a creditor to file a motion for relief from stay is when the debtor is not paying the car loan or mortgage payments, so the creditor seeks an order lifting the stay to exercise their rights to repossess the vehicle or initiate or continue a mortgage foreclosure.
What Documents do You Need to Compile for an Attorney to Prepare a Chapter 7 Case?
- Proof of income for the past seven months, including pay statements, and any other income such as unemployment compensation, bonuses, retirement income and other source
- Collection letters, bills, notices, court papers.
- Last 60 days’ of bank statements of all bank accounts.
- All agreements for purchases or leases of vehicles, motorcycles, RV’s, boats, etc.
- If owing tax debt, all tax notices including obtaining a copy of the “Account Transcript” from the IRS for any years that debt may be owed.
- A complete federal income tax return for the most recent year of filing and total gross income for each debtor for the previous year.
- Court documents of any lawsuits and/or judgments.
- All pre-foreclosure documents (if owning real property).
- Copies of all credit reports (credit reports from all three of the credit bureaus – Experian, Equifax and Transunion – can be obtained for free at AnnualCreditReport.com).
What is the “Means Test” in a Chapter 7 Case?
The means test is a set of calculations that starts with the gross income of the debtor(s) for the six months prior to filing. Income includes all sources, including jobs, self-employment, unemployment compensation, VA benefits, retirement income, and any other incoming funds with the exception of social security payments. The household size must be determined. Certain expenses may also be relevant to the means test, such as payments toward a mortgage or vehicle, or certain other expenses such as daycare, high medical bills, taxes and other items. The means test calculation can be complicated and an analysis by an experienced bankruptcy attorney is highly recommended.
Can a Debtor Keep Their Assets in a Chapter 7 Bankruptcy?
In most circumstances, the answer is yes, but it is very important to consult with an attorney to determine whether assets are protected BEFORE filing the bankruptcy case. When an individual files for bankruptcy, they have what is known as a “bankruptcy estate” which includes all of their assets. The bankruptcy estate includes household goods and furnishings, bank accounts, vehicles, retirement accounts, all other financial accounts, potential claims such as car accident injuries, inheritance (including a right to receive inheritance 180 days AFTER the case is filed), and any and all other claims or assets of the debtor.
It is critical that the individual disclose all assets, because failure to do so will expose the debtor to serious issues, such as the denial or revocation of the bankruptcy discharge, loss of the asset, and possible criminal prosecution.In addition to requirement to disclose any and all assets and claims, it is important to determine whether the assets are protected by bankruptcy exemptions. If you have lived in Washington for the past 730 days, you can choose one of two exemption types, with either the federal exemption or the Washington state exemption. In most situations, the federal exemption is preferable unless a debtor has significant equity in their home. The reason is that the federal exemption includes a significant wildcard exemption. Under the Washington homestead exemption, a debtor can protect up to $125,000 in equity for the debtor’s home. For instance, if the home is worth $300,000 and the mortgage balance is $200,000, the equity can be protected under the homestead exemption. In order to use the Washington homestead exemption, the debtor must have resided in Washington for the past 730 days and the debtor must reside or intend to reside in the residence.
Anyone considering filing a bankruptcy should meet with an experienced bankruptcy attorney to analyze whether most or all of the assets can be protected (exempted). Nonexempt assets in a Chapter 7 case are likely to be sold by the bankruptcy trustee to pay toward the debts. Please call today to schedule a free consultation at any of the office locations of Federal Way, Puyallup or Bremerton.
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