What is Chapter 7 Bankruptcy?
Put aside what you have heard from other people and read on the internet. What you need to look at in the following article are the following topics: Liquidation, Exemptions, Automatic Stay, Trustees, No-asset cases and Asset cases, Discharge. Do not start by assuming you qualify or do not qualify for a Chapter 7 bankruptcy. Please read the following material to get a better idea of what happens in Chapter 7. This will give you a starting point to make decisions. At the end of the discussion we have outlined the process of filing.
Chapter 7 bankruptcy is considered by most people to be the most basic form of bankruptcy. Chapter 7 bankruptcy is a liquidation of your non-exempt assets, where the bankruptcy discharge clears you of many (and sometimes all) of your unsecured debts (such as credit cards, medical bills, payday loans, certain personal loans, utility bills, etc.). The term “liquidation” sounds terrible and it means that some of your property might be seized by the court and sold for the benefit of your creditors. In the vast majority of cases there is nothing to seize for the benefit of creditors and with careful planning by a competent bankruptcy attorney you can be prepared for what to expect and how to reduce your potential losses.
Although bankruptcy cases are filed in federal courts and considered federal cases the laws of the individual states do effect how these cases are managed. The exemption laws, the ones that tell the court and the trustees what property is protected in a bankruptcy case are generally determined by the state you live in. This may vary if you have moved from state to state over the last several years. The exemption laws in Kansas generally protect your basic property from seizure by a bankruptcy trustee to pay your creditors. Your household goods and furnishings, your retirement accounts, equity in a vehicle (up to $20,000) and equity in your homestead are all protected from seizure. You may have other property that is also protected by law and your attorney can tell help you go over things to make sure you are protected.
When you file a Chapter 7 bankruptcy an “order for relief” is issued by the court. This order is called the Automatic Stay. It is a court order that is mailed to all of your creditors that lets them know you have filed a bankruptcy and they have to cease all collections activities. The Bankruptcy Court now has control over what is going on with your debts and assets. The Automatic Stay is in place during your bankruptcy case and protects you. The Automatic Stay is often called an “injunction” by attorneys. An injunction is a court order that normally stops someone from doing something. In this case it stops your creditors. When your case is completed it is replaced by a different court order known as the Discharge or Discharge Injunction.
The automatic stay or “Stay” as it is commonly called by attorneys is most often used to stop garnishments, repossessions, collections attempts, lawsuits and other creditor activity. It does not matter that the creditor already has a judgment or has already filed an action – the Stay will stop actions and force creditors to turn things off.
In a Chapter 7 bankruptcy you file a case and a bankruptcy trustee is appointed to manage the bankruptcy estate. The trustee is an attorney that sits on a panel and is randomly appointed to handle cases. There are currently three active Chapter 7 trustees in Topeka, four active Chapter 7 trustees in Kansas City and five active Chapter 7 trustees in Wichita. Your bankruptcy estate consists of all of the property you own or have an interest in and all of the debts you have outstanding at the time the case is filed. One of the complexities of Chapter 7 practice is that each trustee has some power in their own right to manage their own cases, which means that you cannot predict with absolute certainty the outcomes in any case because each trustee may see an issue differently. Your case is randomly assigned between the trustees and you cannot predict which one will manage your case within each location.
If you file in Topeka you will get one of the three trustees there. If you file in Kansas City you will get one of the four trustees there. Filing in Topeka will not get you one of the trustees in Kansas City and vice versa. It is the same in Wichita.
We can explain just about any concept in bankruptcy, the problem is the number of concepts and how they apply to thousands of individual cases. In this respect Chapter 7 is not the simplest form of bankruptcy but probably the most complex. It can be incredibly simple in some cases and terribly complex in others depending on the individual case. This is in part because of the interaction of the bankruptcy trustees and how they individually manage their cases.
No-asset and Asset cases
In a chapter 7 bankruptcy there are two basic kinds of cases: No-asset and Asset. No-Asset cases are those where the bankruptcy trustee cannot find anything worth seizing and selling or recovering for the benefit of your creditors. Asset cases are those where there is some kind of property that can be seized by the bankruptcy trustee and sold for the benefit of your creditors and it is worth seizing and selling. Asset cases may also arise when there are transactions or transfers that may be recovered by the trustee for the benefit of the creditors.
Now read this carefully. A chapter 7 trustee is paid an initial fee of $60 out of the filing fee of $335 that is paid into the court when your case is filed. That is a very small amount of money for an attorney that normally earns $200 or more an hour. Chapter 7 trustees are also paid a sliding scale fee from the property they recover for the benefit of the creditors. The fee starts at 25% of the first $5,000 they recover and then goes down as they recover larger sums for your creditors. This means they do get paid based on what is recovered.
In Kansas most of the property in the average case filed is completely exempt or simply not worth seizing. The state exemption laws generally prevent the trustees from seizing your basic property and trying to “liquidate” everything. The protection extends to your household goods and furnishings, tax exempt retirement accounts, equity in your car, equity in your home, your clothing, certain types of tax refund money, and numerous other items.
Any non-exempt assets worth seizing are sold, and the proceeds are used to pay down on your debts and pay the trustee. One of the important things to understand is that just because an asset is not exempt does not mean it will be seized. In most cases people have something, such as a baseball card collection or a gun that is not protected by the exemption laws from seizure in the Bankruptcy Court. However, if the value of the item in question is minimal compared to the debts outstanding and there is not enough property to make seizure worthwhile the bankruptcy trustee will abandon the asset.
A Chapter 7 bankruptcy is a one-way street for the most part. If you file a Chapter 7 case and do not like how the case is going you may not be able to get out of it. Let’s imagine you have an asset that you do not think is worth much money – let’s say you have a four-wheeler that has no loan against it and you think it is only worth $1,000. It turns out that the bankruptcy trustee thinks it is worth $2,000 and tells you he wants to seize it and sell it for the benefit of your creditors. Now you may be able to pay the Chapter 7 trustee through some kind of workout to keep it, but you may also want to have your case dismissed and take your chances with your creditors outside of bankruptcy. The problem is that you have no “right” of dismissal once you have filed a Chapter 7 case and it may be impossible to have a Chapter 7 case dismissed once it is filed.
You normally get a discharge in a Chapter 7 bankruptcy within about five to six months of filing the case. This assumes you have complied with the requirements of the court and turned over any property the trustee has requested. The discharge is the court order that wipes out for all time the creditors that can be discharged. Your attorney will go over the creditors in your case that will be wiped out and those that will survive.
In some cases creditors will attempt to get around the discharge by file a special action in the bankruptcy court to have the debt they are owed determined to be “nondischargeable”. Bankruptcy attorneys call these “Adversaries” or “Nondischargeability Actions” or “523 Actions” (shorthand for the bankruptcy code section being used by the creditor). Your attorney can tell you if you will be likely to face this type of action but it is very rare and easy to spot.
The creditors that are normally not discharged in Chapter 7 include: tax debts in some cases, student loans, child support or spousal maintenance (domestic support obligations), property settlement debts from a divorce, criminal fines or penalties, parking tickets, injuries caused to someone else intentionally, debts incurred with no intent to repay them (fraud).
Some of the debts that are not discharged are automatically not discharged, some require a hearing to not be discharged. Your attorney can go over the exceptions with you.
Consult a bankruptcy attorney in this office to talk more about Chapter 7 cases. Chris Coons & Associates has offices in Topeka and Lawrence, and handles cases from 20 surrounding counties.
Often you will speak to one of our bankruptcy attorneys before ever coming in. We try to answer many basic questions over the phone to give you an idea on what to expect. During the actual consultation we will go over all your options and explain what we are looking for when we analyze a case. We have built an office that can file your case quickly, if needed. We have cases that will be filed within 24 hours of our office being contacted and we have cases that have been put off for 3 or 4 years before filing. It all depends on the facts of the case and the choices of our clients.
1) We help you determine if you are qualified to file Chapter 7
You will need to provide pay stubs or income records. We will help you determine whether you are eligible to file a Chapter 7 and whether it is the right option for you. This usually involves a budget meeting and analysis of your assets.
2) Complete mandatory credit counseling before filing
We do this in our office with you and an online service provider. This is not to be confused with the type of credit counseling class you would do over several weeks of time outside of bankruptcy. This is a requirement that takes part of your meeting to sign your case. Most attorneys will have you do it on your own but we like to help people through this process because not all of our clients are tech savvy or have their financial materials organized. We help you get this done by organizing the information and being there to help you answer questions.
3) Put your bills together and let us have them
We will pull all three credit reports; however, we also want a detailed list of all of your debts. Bring your bills. We will sort through them.
4) Complete necessary paperwork
We refer to this appointment as the draft and sign appointment. There are three basic rules at this appointment: disclose, disclose, disclose. A bankruptcy attorney (if you didn’t read this earlier, we love our staff, but lawyers sit down with clients to draft cases in this office) with our office will thoroughly explain the purpose of each form. We will ask you all the required questions and go over the petition, schedules, and all documents line by line.
5) File for Bankruptcy
We file the completed forms electronically using special bankruptcy software. We keep the original signed copies of all but one or two documents in the file (those get mailed into the bankruptcy clerk). The Bankruptcy Court will inform everyone you owe that you have filed for bankruptcy.
6) You attend a hearing.
You and your bankruptcy attorney will attend a hearing where your bankruptcy trustee will confirm with you that your paperwork was completed and correct and you went over it. You are notified of this meeting by mail about 5 to 7 days after filing your case. The meeting is usually set about 30 days after filing the case. This should give you a three week window to plan for the meeting. These are public hearings and normally you will be in a room with other people who have filed for bankruptcy and their attorneys. Your creditors can show and ask questions about your case, but they hardly ever appear.
7) Debtor Education Class
You have to take another class before you can get a discharge and we will provide you with information on different classes you could take. Typically, we refer our clients to a non-profit agency for one on one counseling or provide our clients with a list of online classes. In Kansas City the Bankruptcy Trustee offers a free class at the courthouse.
Once the Court determines that you complied with applicable rules and completed the process, you will get an Order of Discharge. This usually happens within 5-6 months of the date of filing the case. Shortly after, your case will be closed.
If you or a loved one are thinking about filing for Chapter 7 bankruptcy, it’s important for you to know that you are not alone. Our Chapter 7 bankruptcy lawyers at Chris Coons & Associates are supportive, knowledgeable, and want all of our clients to experience the relief that chapter 7 bankruptcy can provide. Please contact our Chapter 7 lawyers for more information and for a free, confidential consultation. Contact us now: (785) 856-8720