What is Chapter 7?
Chapter 7 is frequently referred to as a “fresh start”. It is relatively quick and allows you to discharge most of your debt to allow you to start again with a clean slate. A Chapter 7 is essentially a liquidation process whereby any non-exempt assets are sold to pay off your creditors. However, in almost all cases, there are no assets to sell. In this type of bankruptcy, the entire process takes less than four months.
How do I qualify for Chapter 7?
Prior to 2005, it was possible for virtually anyone to qualify to file a Chapter 7 bankruptcy. However, with the passage of new laws (BAPCA), debtors must pass a “means test” in order to file for relief under this chapter. This is essentially a comparing of income and expenses to determine qualification. The test takes your income over the previous six calendar months and projects an annual income. Even if your income is above the median (the qualifying amount for filing a 7), that does not necessarily mean you don’t qualify. The means test allows you to include all your secured debt (i.e. mortgage, car payments, boat payments, taxes, etc) plus other specific expenses to determine qualification. If it shows that you have no income left after your expenses (keeping in mind that it does not allow you to take all your actual expenses, just your secured ones), you qualify to file a Chapter 7.
How do I file for Chapter 7?
After qualification is determined, the next step is preparing the bankruptcy petition. This petition is several pages long and the most important thing to remember when filing bankruptcy is that you must disclose ALL your debts, creditors, and assets in the petition. If you fail to list a debt or creditor, that debt will not be discharged. It is also important to list all your assets and the value of your assets in order to determine your exemptions. Exemptions are property that the court deems necessary to allow you to have a fresh start. In almost all consumer cases, this means all your property. In other words, you will not need to give anything to the trustee to pay your debts.
Is there anything required before I can file?
A credit counseling class is required by the court before you can file bankruptcy. It is typically a 90 minute class taken over the phone or on-line after which a certificate of completion is issued that must be filed with the court. A filing fee of $299 is also required by the court to file your case. This can be paid up-front or in installments over a 4 month period.
What are my obligations after filing?
Approximately 4-6 weeks after filing your bankruptcy petition, there will be a 341 meeting of creditors. Although it is called a meeting of creditors, it is very rare that a creditor will appear. This is normally your first and only contact with the bankruptcy court. It is meeting conducted by the trustee that verifies that your petition is accurate and you disclosed everything. The trustee may also ask a few questions specific to your case, but the entire meeting is normally concluded in less than 10 minutes. Your attorney will be with you at the meeting as well. Creditors and the trustee have 60 days from the 341 meeting to object to discharge. It is very important to cooperate with the trustee by providing any additional information requested. A class on debtor education is also required before a discharge is granted and the certificate must be filed with the court.
When do I get my discharge and what does it mean?
If all goes as planned, your discharge order is entered shortly after the 60 day window has passed. At that time, your dischargeable debts are wiped clean and you are awarded a clean slate to start anew.
What are my exemptions?
Exemptions are the types and values of assets that are beyond the reach of the creditors in a bankruptcy case. Washington state allows debtors to choose to utilize either the federal bankruptcy exemptions or Washington state’s exemptions. It is very important to go over what kinds of assets you have to determine the best set of exemptions for your case. Generally, if you have equity in your home, you will want to use the Washington State exemptions as they allow for more protection of your home. If you don’t have equity in your home or you don’t own any real property, the federal set of exemptions may be your best choice as they allow the use of a “wildcard” that lets you choose what kind of assets to use it on.
Can I keep my 401(k) and retirement funds?
Many times a debtor’s largest assets are his/her retirement funds. These are 100% protected and are not part of the bankruptcy estate, thus there is never a risk of losing these funds.
What else can be an asset?
Although it is normally very easy to list assets that you own, there are some types that you may not even realize is an asset. However, these must still be listed. These include: the right to file a lawsuit, the right to receive inheritances within 6 months of filing bankruptcy, stock options, and refunds for income received pre-petition. These may be exempted, but you must list them as an asset.
Can I keep my home?
One question that is normally asked is whether you will lose your home when you file bankruptcy. In a Chapter 7, that is a very real possibility if you are behind on your mortgage payments. Filing a Chapter 7 will not stop a foreclosure. If this is your situation, Chapter 13 will be the best option for you. Be sure to let your attorney know of any foreclosure notices you receive. In a 7, if you are current on your mortgage, you will not lose your home except in the rare instance that you have over $125,000 in equity in your home (WA state allows you to protect up to that amount in your home). Again, if you are behind on mortgage payments, a Chapter 7 will not help save your home.
Can I get rid of all of my depts in a Chapter 7?
Not all your debts will be dischargeable in a bankruptcy. Some debts that cannot be discharged include priority taxes, child support, and student loans. It is a good idea to talk with your bankruptcy attorney to find out whether the debts you have can be discharged after your bankruptcy.
How will filing bankruptcy affect my credit report?
Most clients are concerned with how bankruptcy will affect their credit report. However, usually if you are contemplating bankruptcy, your credit report has already been affected. In many instances, filing bankruptcy will actually end up improving your credit as it lets you start “fresh” with no debt. It does take awhile to rebuild your credit, but it likely will take less time by filing than it would to get caught up on the debt by yourself.