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Chapter 7 Bankruptcy Basics

No matter how fiscally responsible and savvy a person may be, no one is completely immune from experiencing financial troubles. It’s important to learn certain financial habits.  They include saving, spending wisely, avoiding overly risky ventures, etc.  They can definitely help put a person on a path toward a good financial future. Even the best habits, though, cannot guarantee that financial hardship will always be averted. Sometimes even those who have developed extremely positive habits suffer unexpected setbacks.  These include events such as job loss, health issue or unanticipated expense.

These setbacks can alter the course of a person’s financial condition. Luckily, our law has created outlets, such as a chapter 7 bankruptcy.  These outlets are there for those who have faced setbacks.  That way, people can have an opportunity to wipe the slate clean.  They can rebuild their financial life that way. In this article, we’ll discuss a Chapter 7 filing for bankruptcy as one of these outlets. 

A Better Financial Future

We’ll discuss chapter 13 bankruptcy in a future post.  For now, though, let’s note that chapter 7 bankruptcy allows taxpayers to completely discharge qualifying debts and financial obligations. In other words, chapter 7 is not a restructuring of debts, it is a full discharge. Naturally, there are numerous requirements to meet for chapter 7 bankruptcy to be an option for taxpayers. In this post, we will go over these requirements.  We’ll also discuss the actual process involved in completing a Chapter 7 bankruptcy.  

It’s important for all citizens to understand that, although it may represent a temporarily bump in the road, bankruptcy is one step toward developing a better financial future and that many, many people are able to financially bounce back after going through this process.  

Basic Overview of a Chapter 7 Bankruptcy 

As stated, a Chapter 7 bankruptcy is a discharge.  That eliminates the debts set forth in the bankruptcy petition.  The bankrupted individual will have no obligation to repay them. However, the key thing to point out here is that only certain debts are eligible to be included. As a general rule, unsecured debts are eligible to include in a bankruptcy.  Those are the debts not secured by collateral. Medical bills, credit card debts, and personal loan debts are examples of unsecured debts generally included.

Secured debts, such as car loans and home mortgages, usually may also be included.  In those cases, though, the debtor must surrender the collateralized asset. This is one reason why Chapter 7 is undesirable for those with significant secure debts.  In those cases, it may be preferable to restructure debts rather than giving up the assets. 

Dischargeable v. Non-Dischargeable Debt

Just as certain debts are generally includable, other debts are generally not includable. Non-dischargeable debts may include unpaid tax debt, unpaid child support, unpaid alimony and student loan debt. Student loan debt is a particularly important non-dischargeable item.  That’s because so many young Americans have large amounts of this type of debt. These debts were actually formerly includable in a bankruptcy.  However, Congress amended the rules several years ago.  In doing so, such debts became non-dischargeable.  It did so due to widespread abuse of student loan repayment rules by indebted graduates. 

Chapter 7 Bankruptcy Requirements & Procedure 

The requirements and procedure of a Chapter 7 bankruptcy are pretty straightforward.  An applicant can complete the entire process in as few as three months.  It rarely takes longer than six months. Before initiating a bankruptcy petition, the person seeking the bankruptcy protection must complete a short credit counseling course. People can select between a number of different courses to satisfy this requirement.  Most courses take just a few hours and are quite inexpensive. Then, after completing the course, the individual must either hire an attorney, or file the bankruptcy petition paperwork himself or herself. Hiring an attorney to conduct a bankruptcy is strongly recommended, because even a small error will ultimately result in the petition being rejected by the court. 

Timing and Means Requirements

To file, the individual seeking relief cannot have filed for bankruptcy within the last eight years. This means that, theoretically, an individual may file for bankruptcy more than once within a lifetime. Once the petition is filed, the individual seeking relief is entitled to an “automatic stay,” which means that all creditors must cease collection efforts immediately and must not attempt to collect any debts throughout the bankruptcy review process. In order to discharge successfully, the individual must pass the “means test,” which is a comprehensive evaluation of the individual’s entire financial situation. The means test will consider a given individual’s current debts, income, assets and expenses. The test is adjusted based on geography, so a filer in Seattle will face a different evaluation when compared with a filer in Atlanta or Boston.  

Trustee Meetings and Education Courses

If the individual filing for relief passes the means test, then a meeting will be scheduled with a court-appointed trustee. If the individual has hired an attorney, the attorney may be present at this meeting. Creditors of the individual may also elect to be present in order to raise objections against the prospective discharge. After this meeting, the individual must complete another financial education course; this course will be similar in size and significance to the pre-bankruptcy credit counseling course.

The individual may have to to forfeit certain nonexempt assets if the court determines that they should be sold in order to compensate creditors. If a person includes secured debts in the bankruptcy, they may need to forfeit the assets securing the debt,  unless they choose to either buy them outright from the creditor or purposely exclude them from the bankruptcy altogether. After the second financial education course is finished, the court will examine all relevant facts and then grant a discharge if one is warranted.  

Call a New York City Tax Attorney For Chapter 7 Bankruptcy Help

As mentioned at the outset, bankruptcy is one way to rebuild one’s financial condition. A Chapter 7 bankruptcy is perhaps the most extreme avenue to pursue given that it can significantly impact one’s creditworthiness for a substantial period of time. In order to determine whether bankruptcy is the most desirable option, you should sit down and make a sober evaluation of your complete financial situation; depending on your circumstances, it might be desirable to pursue another alternative, such as debt consolidation, settlement or a Chapter 13 bankruptcy. In any event, it’s always helpful to consult with a qualified professional when you examine your financial situation, such as one of the tax professionals at Mackay, Caswell & Callahan, P.C. No matter the particulars of your case, a top New York City tax attorney will be able to assist you and help you make the right determination. 

Image credit: Kurtis Garbutt