By Ullian Associates of The Law Firm of Ullian & Associates, P.C. on March 27, 2020
The purpose of a Chapter 7 bankruptcy is to obtain a “fresh start” by eliminating debt, and it is the most common form of bankruptcy. The majority of people filing for Chapter 7 bankruptcy are able to keep everything they own since all their property is protected (exempted from the estate). However, if some of the property is not exempt, a Chapter 7 Trustee will liquidate this property and distribute the funds to creditors. In either situation, your unsecured debts (e.g., credit cards, hospital bills, etc.) will be eliminated.
WHO CAN FILE?
Eligibility for Chapter 7 is based, in part, on the debtor's income. The Means Test determines whether a debtor qualifies for a Chapter 7 discharge. The test compares the debtor’s monthly income over the last six months with his or her state's median income. If the debtor's monthly income is below his or her state's median income, he or she is eligible to receive a Chapter 7 discharge. If the monthly income is over the median income, there is a presumption the debtor is not entitled to a discharge if he or she proceeds with Chapter 7. There are no limits on the amount of debt you can have in order to file a Chapter 7. You must, however, have minimal, if any, disposable income, which is determined by deducting your monthly expenses from your monthly income.
WHAT DEBTS ARE DISCHARGED?
A Chapter 7 bankruptcy wipes out pre-petition unsecured debts (i.e., unsecured debts incurred prior to filing for bankruptcy) and deficiencies owed to secured creditors. A deficiency is when a bank (i.e., a secured creditor) repossesses your car for nonpayment and sells it for less than it is owed. The difference between what the bank was owed and the amount it actually received is the deficiency. In most Chapter 7 cases the discharged debts are credit card debts, personal loans, medical bills, and money owed on a property after it was foreclosed. A Chapter 7 bankruptcy will not discharge your domestic support obligations (i.e. alimony or child support payments). Additionally, student loans are not generally discharged.
WHAT OCCURS WHEN THE CHAPTER 7 IS FILED?
Once the Chapter 7 is filed with the Bankruptcy Court, the bankruptcy will be assigned a docket number. The filing of the bankruptcy constitutes what is technically known as an Order for Relief and invokes the automatic stay. This means your creditors must stop calling, any utility shut-offs will be stopped, any foreclosure actions must be discontinued, and any lawsuits must be halted. In short, the pressure will be off. If a creditor does contact you, all you need to do is give the creditor your docket number, which verifies to a creditor that a bankruptcy was actually filed, or you can refer the creditor to your attorney. It may take a few days for all of your creditors to receive notice of the bankruptcy filing from the Clerk of the Bankruptcy Court.
In addition to the automatic stay taking effect upon the filing, another immediate ramification is that your estate is created (i.e., whatever property interests you have at this time will be in the estate). Your exempt property will not be factored into the final determination of the estate. All the nonexempt assets will be administered by the Trustee for the benefit of your creditors.
WHO IS THE TRUSTEE AND WHAT IS THE 341 HEARING/MEETING OF THE CREDITORS?
Upon the filing for Chapter 7, an interim Trustee will be automatically appointed to your case. The Trustee is compensated by receiving a percentage of the funds that he or she disperses. In a no-asset case (e.g., all of the property is exempt), the Trustee will receive a small fixed amount of compensation since no funds are distributed. The Trustee, in essence, becomes the representative of your estate. Generally, the Trustee will seek to assemble the nonexempt property of the estate, liquidate it, and distribute the proceeds to creditors. The Trustee will initially identify what makes up the estate by looking over the bankruptcy paperwork that you filed and the documents provided by your attorney.
You will meet with the Trustee at the meeting of creditors, also known as the 341 hearing. You will attend with your attorney. The meeting is conducted by the Trustee and is done without the presence of a judge. The purpose of the hearing is so the Trustee can ensure that you signed the bankruptcy papers that were submitted and review with you the information that was provided. The Trustee will ask you any questions that he or she may have and may request additional documents.
Creditors are allowed to attend the 341 hearing, but most of them will not do so. Since they already know their debt is likely to be discharged, there is no point in taking the time to attend, or paying an attorney to appear. The meeting sounds intimidating and may cause you sleepless nights, but typically it is a painless experience. You may even spend more time trying to find a parking space than actually speaking to the Trustee.
For more information on Chapter 7 bankruptcy or to schedule your free consultation with The Law Firm of Ullian & Associates, P.C., contact us here.