What Is a Chapter 7 Bankruptcy?
Chapter 7 is the most common type of bankruptcy. A Chapter 7 bankruptcy will discharge most all types of debts; including medical bills, credit cards, deficiency balances, credit union loans, personal loans, store cards, credit lines, payday loans and more. There are a few debts a Chapter 7 bankruptcy may not discharge including student loans, debts incurred through fraud, child support obligations and certain tax debts.
The Chapter 7 bankruptcy will stop most collection activity; including wage garnishments, liens against bank accounts, harassing phone calls, etc. An individual may only file a Chapter 7 bankruptcy once every eight years. The debtor has to wait six years after having filed a successfully completed Chapter 13 wage earners plan before filing a Chapter 7 bankruptcy.
Once you file a Chapter 7 bankruptcy, a trustee is assigned to your case. The trustee’s job is to liquidate any unexempt assets you may have for the benefit of your creditors. This means he will take any assets you have that are not exempted or fully encumbered by liens and sell those assets to raise money to pay your creditors. The trustee may take assets like houses, cars, cash, financial assets, tax refunds and more. Exemptions are laws that allow a debtor to keep certain property. If a debtor claims a valid exemption in a particular asset, then the trustee may not take that asset to administer it for the benefit of the creditors. Some items that may be exempt include: (1) an automobile, (2) clothing, (3) household goods and electronics, (4) a limited amount of cash, (5) retirement plans, (6) life insurance policies, (7) IRAs, (8) firearms, (9) child support and spousal support, etc.
It is important to understand the difference between a secured and unsecured debt.
A secured debt is one in which the creditor retains a lien against property of the debtor; also, the property that is subject to a lien is called collateral. Examples of secured debts are automobile loans, title loans, home mortgages, furniture loans and certain store cards where they retain a security interest in the valuable property the merchant sold you – like jewelry.
An unsecured debt is one where the creditor has no lien against the debtor’s property or assets. Examples of unsecured debt are medical bills, payday loans, credit card debt and signature loans. Even though the Chapter 7 bankruptcy may discharge a secured debt, the debtor would still have to make the monthly payments in order to keep the collateral. If the debtor fails to continue making his house or car payments the creditor will most likely repossess or foreclose on the collateral.
Mortgages and Judgement Liens
A judgment lien attaches to your property without your consent after a court proceeding. This type of lien is created when someone wins a lawsuit against the opposed and then records the judgement against their property. Furthermore, a judgement lien that attaches to equity in the real estate is not dischargeable in a Chapter 7 bankruptcy. If the judgment lien never attaches to equity in the property, then it may be dischargeable after filing an action to strip the lien.
Another type of lien, the purchase money security lien, commonly attaches to houses, cars, and furniture and will not be discharged in a Chapter 7 bankruptcy. Even though the debt associated with the lien may be discharged, the debtor must still continue paying on the debt, or the creditor will be able to repossess the collateral. In many chapter 7 bankruptcies, the debtor continues making his car, house and furniture payments so that these items are not taken.
In some cases, you may be able to lien strip a second mortgage in a chapter 13 bankruptcy if it never attached to equity in the real property.
Prior to filing bankruptcy, the debtor is required by the Bankruptcy Code to take a credit counseling class. These classes can be taken online, in person or over the telephone. After the bankruptcy is filed, the debtor is required to take a second class, referred to as a Debtor Education Class. Debtors must take two credit counseling classes in order to receive discharge. The first class must be taken prior to filing for bankruptcy; and the second class must be taken after filing for bankruptcy. If either class is not taken, the bankruptcy court may dismiss the case.
A 341 Hearing is known as the Meeting of Creditors. The meeting of creditors is not a court hearing; rather it is a meeting run by the debtor’s bankruptcy trustee and is usually held in an office type environment. If you have filed for Chapter 7 bankruptcy you must attend this hearing.
The 341 Hearing is conducted by the trustee for the purpose of asking the debtor questions about their bankruptcy schedules. Also, during the hearing, the trustee may ask you questions regarding your reasons for filing bankruptcy. The hearing will help the trustee determine if you have any nonexempt property that can be sold, or if you have any money that you disposed of before filing bankruptcy that can be retrieved for your creditors. The debtor must bring his or her social security card and photo identification (a driver’s license) to the hearing.
The Following Debts MAY not be Discharged in a Chapter 7 Bankruptcy:
The following debts may not be discharged in Chapter 7 bankruptcy:
- Certain tax debts
- Certain road and bridge tolls
- Child support obligations
- Spousal support obligations
- Certain debts incurred as the result of intentional torts
- Debt incurred as the result of fraud
- Debts incurred as the result of a DUI
- Debts incurred for an educational purpose, including student loans
- Debts incurred immediately prior to filing bankruptcy
- Debts owed to the government for overpayments or military reenlistment bonuses
A reaffirmation agreement is a contract between you and one of your creditors by which you agree to remain legally obligated to pay a debt after bankruptcy. If a reaffirmation agreement is signed and approved by the court, and you fail to fulfill the agreement (after bankruptcy), then the creditor may sue you and garnish your wages. The creditor can pursue you as if you never filed for bankruptcy protection. In some cases, you may want to risk signing a reaffirmation agreement, especially if the creditor is giving you a break on the balance owed, monthly payment, or interest rate. For example, in many cases the debtor will sign a reaffirmation agreement with the company that financed their car because they wish to keep the automobile.
Typically folks receive a tax refund from the state and federal governments in the first few months of the year, after they have filed their tax returns. Virginia exemptions allow most debtors to keep much of their tax refund. However, prior to filing bankruptcy, debtors should be careful not to use their tax refund to repay debts; including those to friends or relatives.
A Bankruptcy Petition and Schedules
You and your attorney will go over the bankruptcy petition and schedules prior to signing them. All of the information in the petition and schedules must be 100% complete and accurate or you risk being prosecuted for bankruptcy fraud and perjury. This means you cannot omit from your schedules any assets, liabilities, or recent transactions.
The information provided on Chapter 7 bankruptcy is a starting point to help you learn about your bankruptcy options. Also, it is to help you understand the formalities of Chapter 7 bankruptcy. In order to learn more about bankruptcy and the alternatives to bankruptcy please continue reading throughout our website.
If you would like more information about bankruptcy and how it may be able to help you become debt free, please call (757) 896-0868 to speak with one of our experienced lawyers.
The John W. Lee, P.C. Law Firm is a bankruptcy and debt relief agency with six experienced lawyers on staff with a wide variety of legal expertise. With over 70 years of combined legal experience, the attorneys at John W. Lee, P.C. are able to offer the highest level of service, reasonable attorneys’ fees, quick turn around and excellent results. We are conveniently located throughout Hampton Roads with offices in Virginia Beach, Hampton, Newport News and Chesapeake.