Chapter 7 Bankruptcy
Chapter 7 Bankruptcy cases can be filed by both individuals and businesses. Chapter 7 bankruptcies are also called "liquidation” or “straight” bankruptcy. Chapter 7 is the most common type of bankruptcy and is also generally the simplest and quickest. In a Chapter 7 case, the debtor liquidates their non-exempt assets in order to be relieved of their debts. As soon as the case is filed the automatic stay in bankruptcy stops most debt-collection activities including lawsuits, foreclosure and repossession. The court appoints a trustee who oversees the case and liquidates and non-exempt assets and pays creditors. In most cases, a debtor's assets are exempt (property you can keep) or already subject to liens, so there is generally nothing to liquidate. When there are assets, the trustee liquidates those assets and pays debts with the proceeds. Chapter 7 cases usually last for about three to four months prior to being closed.
Chapter 7 Bankruptcies May Be "Voluntary" or "Involuntary"
Most Chapter 7 bankruptcy cases are voluntarily filed by a debtor. However, not all bankruptcy proceedings are voluntary. Under certain circumstances Creditors have the option of filing a bankruptcy against a debtor. This type of proceeding is called an "involuntary bankruptcy." Involuntary bankruptcies are rare and only allowed only when certain minimum requirements are met. The debtor has the right to respond to an involuntary petition and the Court will determine whether the creditors had the right to file the involuntary case. If the court dismisses an involuntary bankruptcy filing because it has no merit, the creditors can be ordered to reimburse the debtor for fees, costs, damages and losses due to the bankruptcy.
Eligibility for Chapter 7 Relief
Not everyone can file for Chapter 7 Bankruptcy relief. There are income requirements, time requirements and various other legal and strategical reasons not to file for Chapter 7 relief. You should speak with an attorney to discuss these options. First, you must undergo a "means test": to qualify for Chapter 7 bankruptcy. This is where your income and expenses are examined to see how they compare to the standard for your area as set by the IRS.
If you earn less than the median income for a family of your size in your state, you “pass” the means test and can file for Chapter 7 bankruptcy. However, if your income from the last six months is greater than the median income and after completing the means testing calculations you can pay at least $6,000 over five years or $100 a month, toward your debt you can't file for Chapter 7. You must file for Chapter 13 bankruptcy.
INDIVIDUAL OR “CONSUMER” BANKRUPTCY CASES:
All Chapter 7 cases are liquidation cases. Liquidation cases mean that the Chapter 7 trustee may be able to take and liquidate (sell) some of your assets and use the sales proceeds to pay toward your creditors. However, most people in Chapter 7 case are able to keep their assets as most property is exempt and protected from creditors under applicable State exemption laws.
When determining what is considered exempt, many states (including Georgia)require you to use the state's definition of exempt property. Exempt property means property that you can keep and can’t be taken from you when you file for bankruptcy protection. The Georgia exemption law may be found at the Official Code of Georgia Section 44-13-100. Click for link to Georgia Code. Federal bankruptcy exemptions are not available in Georgia.
44-13-100 - Real or personal property, including co-op, used as a residence, up to $10,000 (up to $20,000 if married whether the spouse is filing or not). Unused portion up to $5,000 may be applied to any other property.
44-13-100 - Motor vehicles up to $3,500; clothing, household goods, appliances, furnishings, books, musical instruments, animals, and crops up to $300 per item and $5,000 total; jewelry up to $500; health aids; lost future earnings recoveries needed for support up to $7,500; personal injury recoveries up to $10,000; wrongful death recoveries needed for support; burial plot in lieu of homestead. Also, any property up to $600 plus any unused homestead amount up to $5,000.
18-4-20 - For private and federal workers, either 40 times the state or federal hourly minimum wage or a minimum 75% of earned but unpaid earnings; whichever amount is greater. The judge may authorize more for low-income debtors.
11 U.S.C. § 522 - Tax exempt retirement accounts. Traditional IRAs and Roth IRAs up to $1,095,000 per person.
18-4-22 - ERISA-IRAs and qualified benefits.
44-13-100 - Nonprofit corporations' employees; public employees; other pensions and IRA payments needed for support.
34-9-84 - Workers' compensation.
44-13-100 - Unemployment compensation, Veterans' benefits, social security, crime victims' compensation, and local public assistance.
49-4-35 - Old age assistance.
49-4-58 - Aid to blind.
49-4-84 - Aid to disabled.
Tools of Trade
44-13-100 - Tools, books, and implements of trade up to $1,500.
Alimony and Child Support
44-13-100 - Alimony and child support needed for support.
33-15-62 - Fraternal benefit society benefits.
33-26-5 - Life insurance proceeds and availables.
33-28-7 - Annuity and endowment contract benefits.
33-29-15 - Disability or health benefits up to $250 per month.
33-30-10 - Group insurance.
44-13-100 - Unmatured life insurance contract; unmatured life insurance dividends, interest, loan value or cash value up to $2,000 if you or someone you depend on is beneficiary; life insurance proceeds if policy is owned by someone you depend on and is needed for support.
Most chapter 7 cases are "no-asset" cases, which means that you don't have nonexempt property for the trustee to sell. When you file your petition for bankruptcy, you declare whether your case is "asset" or "no-asset."
Filing Chapter 7
Bankruptcy starts with filing an official bankruptcy petition, schedules and Statement of Financial Affairs (SOFA) with the Bankruptcy Court. To complete these forms, you must provide:
- A full list of creditors
- The amount and type of their claim, the source, amount and frequency of your income
- A list of all your property
- A detailed list of monthly living expenses
As soon as you file for bankruptcy protection, creditors are prevented from trying to collect on your debts because of the "automatic stay." The automatic stay preserves your property and gives you a break from being sued.
Creditors must show the bankruptcy judge there is good cause to continue with collection action. For instance, by showing that property might deteriorate in value during the bankruptcy period.
If there is nonexempt property, the trustee will control of it. The trustee will sell the property and pay administration fees and then pay any remaining money to creditors with active and approved claims. These will be paid in a level of priority. Any wages earned after filing, you keep and are beyond the reach of creditors prior to the filing date.
341 Hearing (Meeting of Creditors):
Approximately 30 days after filing your petition, the trustee holds a "first meeting of creditors," called a "341" meeting. You must be present. You'll be asked questions by the trustee under oath about your property and debts. Creditors can also question you, but seldom do.
Generally the only responsibility you have after the 341 meeting is cooperating with the trustee and providing any requested information or documents.Creditors have 60 days after the meeting to file and adversary proceeding and convince the bankruptcy court they should be paid and shouldn't be "discharged."
You can also be approached about "reaffirmation" of debts. This is an agreement between you and the creditor showing that you will assume and pay the remaining portion of the debt to keep certain property, even if their debt is being discharged. This could prevent an automobile from being sold instead.
Under the old bankruptcy law, you could make car payments when they became due. When the loan was fully paid, title to the car would be transferred to you. If you defaulted on the loan after discharge, the creditor could repossess the car, but the repossession deficiency amount that you owed would still be wiped out and you would owe nothing.
Under the new law, you have to declare again your dedication to your car loan within 45 days after the "341 meeting." You can no longer continue to make car payments without reaffirming loan. If you default on your payments after the loan is reaffirmed and the car is repossessed, you are liable for the repossession deficiency.
There is also an option to purchase the car within 45 days of the "341 meeting." This means that you have to pay the entire balance that is due within that time period. Because most debtors do not have that kind of money, this option is rarely used.
If you decide to reaffirm a debt, you must file an agreement with the court. The agreement has to disclose:
- your income and expenses so that the court can see that there is sufficient money to pay the reaffirmed debt
- that you were advised of the amount of the debt you are reaffirming
- how the debt was calculated and;
- that you are aware that the debt will not be discharged
Your attorney must certify in writing that they advised you of the legal consequences of the agreement, you were fully informed and entered into the agreement voluntarily, and that the reaffirmation will not create an undue hardship on you and your family.
Unsecured creditors (i.e. creditors that lend money without obtaining assets as collateral) may offer deals for new credit based on reaffirming the existing balance on your credit card.
Will all my debts be discharged?
The basic principal of bankruptcy law is to provide an honest but unfortunate debtor who is in debt beyond his or her ability to repay a chance for a "fresh start." A fresh start is obtained be receiving a discharge of debts. Usually within 60 days of the 341 meeting most of your debts that existed before you filed your bankruptcy case will be discharged (cancelled). As mentioned, most debts are dischargeable in bankruptcy. However, there are some debts that are not dischargeable. The following is a list of debts will not generally be discharged. This list is not exhaustive but includes the mail non-dischargeable debts.
- Debts which have are determined by the Bankruptcy Court to be non-dischargeable as the result of debts created through false pretenses or misrepresentations or for money or property obtained by fraud or for damages arising for willful and malicious injury to property;
- Certain taxes are also non-dischargeable;
- Unscheduled debts, that is, debts which you purposely fail to list on the schedules;
- Debts owed to a spouse, former spouse, or child for alimony, maintenance and support or incurred as the result of a property settlement agreement;
- Debts for fines, penalties, restitution or forfeitures payable to a governmental unit or as the result of a conviction in a criminal case;
- Debts because of damages, injuries or death resulting from driving while intoxicated;
- Debts for most student loans;
- Debts which you owed before a previous bankruptcy case in which you were denied a discharge;
- Secured debts which you agree to keep and reaffirm/assume with the creditor;
Those debts which are secured and which you do not agree to keep and reaffirm will be discharged; however, the creditor will probably take the necessary legal steps to take back the property. This is usually through a repossession or foreclosure action.
What happens to my credit rating after a Chapter 7 Bankruptcy?
The answer to this question varies from case to case and depends upon your prior credit history. Any prior credit that has been paid and is in good standing remains that way. Also any secured accounts that you are going to continue paying (car, house, etc.) will continue to show. A bankruptcy can be listed on your credit report for up to 7 years on any discharged account and for up to 10 years as a public record that a bankruptcy case was filed. However, by the time most debtors have filed bankruptcy, their credit rating is already damaged so the bankruptcy can often time improve credit ratings.
How do I re-establish my credit after Bankruptcy?
Once your bankruptcy case is discharged you may be surprised to find that creditors will send you preapproved accounts or otherwise offer to extend credit to you. That is because after a discharge your listed debts are wiped out and you can’t file a new case for a period of time. Creditors know that if they extend credit to you after discharge they are first in line to get paid and that you can’t obtain a new bankruptcy discharge for some time. Remember to continue paying any accounts that you are keeping on time and to pay any new accounts on time. This will help rebuild your credit.
Can I keep my home and personal property?
In most Chapter 7 cases the answer is yes. You are entitled to certain homestead exemptions and as long as you maintain the payments you can keep the collateral. Most personal property is also exempt and many times liens against personal property can be eliminated or greatly reduced.
Business or “Commercial” Bankruptcy Cases:
Business or Commercial Bankruptcy is an option for a business that can no longer pay its debts. Chapter 7 business liquidations are conducted virtually the same as a consumer bankruptcy. Business's assets are sold and the proceeds are divided among the company's creditors. When the debtor is a corporation, it no longer exists after liquidation and distribution. As such, there is no discharge.
For an owner or board of directors it is often a difficult decision to close and wind down a business. Closing an insolvent company can be difficult, expensive and time consuming. Bankruptcy may be a viable option to address closing a business. When thinking about closing a business and filing bankruptcy the type of entity must be determined (Corporation, LLC, partnership or sole proprietorship) and to determine if the business should be reorganized or liquidated.
Corporations, limited liability companies and partnerships are legal entities separate from their shareholders or partners. Each of these can file Chapter 7 or Chapter 11 bankruptcy protection on their own. Sole proprietorships are not separate entities. These types of businesses can't file bankruptcy. The business owner would have to file a personal bankruptcy as the assets and the liabilities of the business are the owner’s individually.
Business Chapter 7 Options:
Individuals can get a discharge of their dischargeable debts and a chance to start over. Corporations do not receive discharges. However, a Chapter 7 can provide an orderly liquidation and wind down of a business at little or no expense to the shareholders. Creditors of the business are paid to the extent of the assets available and the priority of their claim.
As a corporation does not receive a discharge, deciding to file a bankruptcy as opposed to simply closing the doors, liquidating the assets, and allowing the state to terminate the corporate existence is a decision that must be analyzed. There are various reasons to consider bankruptcy over just closing the doors. The shareholders and/or board of directors should meet with a bankruptcy attorney to discuss the pros and cons as well as the various options.