Chapter 7

Otherwise known as a “liquidation plan”, this is probably the most frequently chosen of all the bankruptcy plans. It’s attractiveness comes from the fact that all unsecured (e.g., credit cards, personal loans, medical bills, leases, business debts, tax penalties over 3 years old, accident claims, judgments, etc.) debts may be eliminated (liquidated, discharged, or “rid of”). Note that we didn’t include back due taxes in this group as they can be a “priority” debt, hence if there is not enough money available to pay the taxes, they will survive the bankruptcy and you will still owe them. If you have not filed a return you cannot discharge the tax.

Some of the debts that cannot be discharged are: recent taxes, student loans, child support, spousal support and debts incurred by fraud. See the separate discussion under Fraud.

Typical Chapter 7 procedure involves the following steps:

1. Tax returns

We need to see the tax returns for the two most recently filed tax years and paycheck stubs for the preceding two months. If self employed, a Profit and Loss Statement for the three most recent months will be needed at the time of the initial interview or shortly thereafter.

2. Income/Expense test

Is your current income higher than you current expenses? If no, you probably, but not always, qualify for Chapter 7. In most cases the means test needs to be run.

3. Means Test

The recent changes in bankruptcy laws have created a “means test”. This test determines your ability to pay some of the debts by looking at your average income for the six months prior to filing, expenses and what the treasury regulations allow for the family size as yours and comes up with the number that you would be able to pay. This calculation may disqualify you from Chapter 7 and push you into Chapter 13 bankruptcy. The timing of your filing would be very important here. If you are about to be laid off, your average income will decrease and you may want to delay the filing of your case. If you are about to become employed or expect a significant increase in your income, you may want to file immediately in order to keep the average income down. This is one of the reasons why it’s critical to have accurate information available as soon as possible.

4. Statement of Financial Affairs.

This document looks at your financial activities during recent history, although it may look back several years. You must accurately report income for the current year and the two preceding years, recent payments to creditors, property transfers, open and closed financial accounts and other financial data. Property transfers are of particular interest as they may trigger claims of fraud by trustee and may be reversible. Nothing less than total honesty will suffice in reporting the information asked for. Transferring property to another, especially for less than market value, will definitely catch attention and may be fraudulent if it’s done for the purposes of avoiding debt payments.

5. Personal Property Schedules

You must report value of your personal assets such household goods and furnishings, clothing, jewelry, office equipment, cars and similar items. We then apply exemption laws to determine what portion of these items is protected from the reach of the bankruptcy trustee. There are presently no category limits on how much one may have in household goods or clothing. The exemption planning is critical and must be done very carefully. If you do not exempt an item properly you may lose it in the bankruptcy process.

6. Real Property Scheduled

You must list all real property and mortgages on such property.

7. Case preparation and filing

Prior to filing you must take a credit counseling class. This usually takes about an hour and is done by accessing a court approved service providers. When all the data are in we will review the case with you and, if all the numbers are correct file it as a Chapter 7. The entire process is iterative in its nature as sometimes we don’t have all the necessary information or the client’s circumstances change. Shortly after the case has been filed a bankruptcy trustee (not a court employee but a self employed individual) is appointed. We supply the trustee with the tax returns and the paycheck records you had given us. The trustee’s job is to administer your estate and pay as much as possible to the creditors after applying proper exemptions. During this process the trustee concentrates on discovering what assets you have and after applying exemptions decides if there is any money left to pay the creditors.

There’s usually one trustee meeting called the 341 meeting (named after the bankruptcy code section). You are sworn in and the trustee asks you questions about the information you have filed. This meeting typically lasts only couple of minutes unless the trustee discovers some inconsistencies in your statements. Assuming everything went well you will receive a Discharge letter from the court in about 2 months saying that your debts have been discharged. You need to keep this letter forever. The reason for this is that some creditors sell the debts to others who most likely will not know anything about your bankruptcy, and will attempt to collect from you.

8. Dischargeable debts

Generally: credit card bills, unsecured loans, guarantees, taxes over 3 years old, judgments, bills to service providers, e.g., doctors, dentists, attorneys, accident claims, repossession deficiencies and negligence claims.

9. Non-dischargeable debts

Generally: fraudulently acquired debts, student loans, child and family support, recent taxes.

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