What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is a federal law, a part of the Bankruptcy Code, which allows individuals, couples, partnerships and corporations to make their debts owed to creditors unenforceable. When a Chapter 7 case is filed in the Bankruptcy Court, an automatic stay (injunction) goes into effect. This prevents the continuation of civil lawsuits, attempts to collect civil debt and many state administrative proceedings. It stays foreclosures both by the IRS and creditors. An individual or couple usually receives a discharge in approximately 120 days after the bankruptcy filing. This discharge serves as a permanent injunction against most civil collection actions and attempts to collect debt. It does not apply to child support, current IRS taxes, criminal matters and student loans.
Debt Relief - a Laredo Couple Example
For example, a debtor defaults on a sizeable loan to a well known bank in Laredo. The debt is over $150,000.00. The debtor cannot pay because his business has failed and his wife is suffering from a serious illness with $35,000.00 in medical bills which his insurance company won’t pay. The couple has accrued $50,000.00 in credit card debt for living expense - just to survive during “hard times”. This situation may be appropriate for a Chapter 7 filing. Absent any fraud or material misrepresentation, the bank, the credit card and the medical debt would be discharged. The end result would likely be $235,000.00 in debt being discharged.
The Objective of a Chapter 7 Case: a Fresh Start
The objective of a Chapter 7 proceeding is to enable the debtor to obtain a “fresh start”.
Some call this being “born again” financially. After the discharge, the dischargeable debts are unenforceable and can no longer be collected. Since they can no longer be collected the consumer creditors must remove the debt from their reporting to the three major credit bureaus. They should report - 0 - balance: debt discharged in bankruptcy. The removal of derogatory credit references should serve to increase one’s credit score because there are fewer debts with any balances.
How To File Chapter 7 Bankruptcy
Before an individual can file a Chapter 7 Bankruptcy he or she must first take a Court approved financial counseling course. Not all financial counseling courses are approved by the office of the United States Trustee which oversees bankruptcy cases for the government.
Once the course is completed, a certificate is issued which must be filed with the Court along with a Bankruptcy Petition and Schedules and a Statement of Financial Affairs. Proof of earnings must also be submitted to the Court. The filing of the Bankruptcy Petition automatically invokes the automatic stay which prevents creditors from attempting to continue to collect debts. The detailed schedules, which must be sworn to under oath, sufficiently identify the debtors’ property both real (real estate) and personal (everything else), the debtors’ creditors (including correct name, address and account number). Creditors which are not properly scheduled will not have their debts discharged. Schedules of monthly income and expense must be filed with the Court along with the Statement of Financial Affairs on which past income must be disclosed along with the details of transfers (gifts, sales, trades, foreclosures) of the debtors’ property and the details of any businesses with which the debtors were involved, the details of any lawsuits, identity of ex-spouses and several other categories of information which must also be disclosed. The filing fee for a Chapter 7 proceeding is around $300 and is paid to the Clerk of the Court at the time of filing.
Detail is Required in Bankruptcy Schedules
A failure to file the bankruptcy documents in a complete, timely and proper fashion may result in the case being dismissed by the Court for “failure to prosecute”. Therefore, it is important that all documents be prepared by an experienced professional bankruptcy attorney. Laredo Bankruptcy Attorney Martin Seidler has assisted individuals, partnerships and corporations in filing Chapter 7 bankruptcies for over 30 years.
Bankruptcy Time Line
Once a Chapter 7 Bankruptcy is filed, a Bankruptcy Judge and Bankruptcy Trustee are assigned to the case. The Court will issue a notice of meeting of creditors (section 341 notice). This is an informal hearing where the debtor is placed under oath and questioned by the Chapter 7 Trustee about debts, assets and possibly transfers of property. Creditors also have the opportunity to ask the debtor questions. It is rare for unsecured creditors to appear at such meetings. This meeting usually takes place from 30 to 40 days after filing. In a simple case, the questioning usually takes 10 minutes or less. The debtor usually does not go before the Bankruptcy Judge unless there are problems in the case. The debtor must take a second an much longer (2 ½ hour) course after the bankruptcy filing. A certificate is also issued upon completion of this course which must be filed with the Court prior to the discharge date.
The Chapter 7 Discharge
A individual will not receive a discharge until this second course certificate is so filed. The discharge (Court order which permanently bars collection of debt) is issued by the Court about 120 days after the date of the Chapter 7 Bankruptcy filing. Copies are mailed to all creditors so they are put on notice not to attempt to collect their debts in the future. Those creditors who intentionally violate the automatic stay or discharge injunction may be held in contempt, fined and assessed attorney’s fees.
The Bankruptcy Estate
When a Chapter 7 Bankruptcy case is filed an estate is created. All of the debtors’ assets become part of the estate. Later the estate is separated into two parts - exempt property and non-exempt property. Exempt property is that which the debtor keeps free of the claims of the trustee and the unsecured creditors. Non-exempt property is that which the trustee administers. It is the trustee’s job to liquidate non-exempt property to the pay the claims which may be filed by creditors against the estate.
In Laredo bankruptcy cases, debtor may choose from the Texas or federal exemptions to exempt their property. Most cases are “no-asset” cases in which there is little or no non-exempt property for the trustee to administer. The trustee usually closes these cases after the meeting of creditors since there is no property to recover for the creditors.
Bankruptcy Planning is Necessary for a Good Result
Proper bankruptcy planning is essential to a satisfactory case result. Poor or no planning may result in the loss of valuable property which the debtor wished to keep or worse, loss of one’s bankruptcy discharge for violating the provisions of the Bankruptcy Code. For example, a husband and wife owe several hundred thousand dollars in credit card and bank debt. The wife’s portion is very small. She was just a signatory (but not liable) on the husband’s sizeable credit card debt. The couple own a valuable home on 200 acres in Webb County, Texas and the wife owns a royalty interest in three producing gas wells which she inherited in Zapata County, Texas.
In this case proper bankruptcy planning would eliminate the wife’s joinder or participation in the Chapter 7 filing. The husband must file Chapter 7 alone without his spouse to protect the family ranch.
A couple or head of household may claim up to 200 acres in rural homestead. Nevertheless, a royalty interest in another a county not located on exempt homestead may not be claimed as exempt under Texas law. Had the wife filed bankruptcy with the husband in this example her inherited royalty would have been non-exempt and would have been liquidated by the Chapter 7 trustee in order to pay creditors. This is why it is necessary to have an experienced Chapter 7 Bankruptcy lawyer assist in pre-bankruptcy planning.
Laredo Bankruptcy lawyer Martin Seidler is well experienced in this area. He also served as a Chapter 7 Bankruptcy Trustee in thousands of cases for many years.