What is Chapter 7?
Chapter 7 is the most common type of bankruptcy for personal debtors. It is also referred to as straight or liquidation bankruptcy. Chapter 7 is most suitable, and most frequently used, by individuals, but can also be an option for businesses as a last resort to have their slate wiped clean. Chapter 7 bankruptcy is most often used by people who are far behind on their bills with unsecured debts to reset their finances. For example, people with tax debt.
The two most notable disadvantages of filing for Chapter 7 bankruptcy are that debtors may have to give up some of their personal belongings, and it will have a negative impact on a debtor’s credit that may be hard to recover. When debtor’s file for Chapter 7 bankruptcy, they are allowed by the Bankruptcy Code to keep certain property that is exempt from bankruptcy, but their other assets will be liquidated by a trustee. Unlike Chapter 13 bankruptcy, in which a repayment plan is filed, the nonexempt liquidated assets will be used to pay holders of claims.
More often than not in debtors who file Chapter 7, the creditors do not receive all of the debt that is owed to them. If the debtor does not have enough assets to cover all debts, then the leftover balances are dismissed and the debtor does not owe that money anymore. The only debts that are still the responsibility of the debtors following the filing are child support, alimony, court fees, and most student loans.
Once the debtor determines they are eligible for filing, they will decide to either file with an attorney or on their own. From then, they attend credit counseling from an approved agency – this must occur within five or six months of filing. Then the debtor will file their forms. There is a fee to file these forms, but a waiver request can be filed and may be approved based on income. Once those documents are accepted, the debtor will send verification documents to their appointed trustee. After the trustee accepts these documents, there is a creditor meeting where the trustee discusses the debtor’s financial situation. Following this, the debtor must attend a budget counseling course, and after certification of course completion is sent to the court, it takes roughly sixty days before the debtor receives notice that their debts have been discharged. This is a general practice, though it may vary slightly based on location and situation.
How Does Bankruptcy Work?
First the debtor will have to file a petition with the bankruptcy court designated to their place of residence. As well as the petition, a lot of paperwork and records are required: assets and liabilities, income and expenditures, statement of financial affairs, as well as the previous years’ tax return, among a few other things depending on location. If a married couple is filing, they may file either jointly or individually. Most often, any court fees are paid upfront. However, in certain cases and with the court’s permission, a debtor may be able to pay in installments. Also, in cases where the debtor’s income is below 150% of the poverty level, the court fees may be waived.
Upon filing for Chapter 7 bankruptcy, the court will place a hold on the debtor’s withstanding debts. This will stop debt collectors from attempting to collect payment from the debtor, as well as halting any effort to garnish wages, foreclose upon the debtor’s home or evict them, or repossess the debtor’s property. The bankruptcy clerk will give notice of bankruptcy to all of the debtor’s listed creditors, so the phone calls, letters, and emails sent in attempts to collect debt will likely stop shortly after filing.
All nonexempt assets are then the legal property of the court. From there, a trustee is appointed to the case, who will liquidate the debtor’s nonexempt assets without any upfront cost. The trustee evaluates all of the debtor’s property, and decides what is valuable enough to be liquidated. Some states may let the debtor choose between state of federal exemptions. The list of exempt property often varies depending on location, but most commonly include homes and non-recreational vehicles. However, if the debtor would like these assets to be liquidized, they may note this on their filing. Items of low value are also not liquidated. Items that are most often liquidated include designer clothes, jewelry, recreational vehicles (such as boats or jet skis), among many other items deemed unnecessary.
It is crucial that the debtor cooperates and provides all requested documents to the court, as this is the best way to ensure that the bankruptcy case goes as seamlessly as possible. If records are left out or forgotten by the debtor, it can result in denial to discharge debts. In other words, if the debtor fails to cooperate, they may still be required to pay debts that were established prior to filing.
In some cases, secure creditors may have the right to pursue debt collection even following the debtor filing for bankruptcy. When the debtor is behind on payments on their automobile or home, for example, they are still subject to have their home foreclosed upon or their car repossessed. For this reason, it is best to continue to make payments through filing for bankruptcy, or pay the full amount upfront to own the item. To note another example, if the debtor would like to have credit card debt cleared, but the credit card company proves the recent purchase of luxury goods or nonessential items, it may be required that the debtor still pays a portion or their entire bill.
Some unsecured debts will not be discharged under any circumstances after filing for Chapter 7 bankruptcy, these include debts that were intentionally left off the filing or personal injury debts that happened in an accident that occurred while the debtor was under the influence of drugs or alcohol. Also, an involuntary Chapter 7 case may commence following a petition by the creditors who have failed to collect from a debtor, but this only occurs under unique circumstances.
Typically, a Chapter 7 bankruptcy case will take between four to six months from start to finish. However, this can vary depending on circumstance – such as the trustee requesting more paperwork from the debtor, or if the debtor would like to get taxes or student loans discharged in their filing, which is possible, but will likely extend the duration of the trial.
Tax Debt and Chapter 7 Bankruptcy In Southern Utah
Many attorneys may advertise the clearing of taxes in filing for Chapter 7. However, many taxes are not eligible for discharging, even in filing for bankruptcy. Taxes are only eligible for discharging when the taxes in question are income taxes, the debtor did not commit fraud or willful evasion, the debt is over three years old, and the debtor filed a tax return. Naturally, this leaves a very small number of taxes that are actually covered under filing for Chapter 7.
In addition, if the debtor’s taxes are eligible for discharge, the bankruptcy filing will clear the debtor’s responsibility to pay the taxes – however, any prior tax liens will not be cleared through filing Chapter 7. Tax liens are something the government imposes on property owned by somebody who has not paid taxes for said property. This means that, even if the taxes are cleared through filing, the debtor will still have to pay the tax liens before selling the property.
It is important to note that filing for bankruptcy will certainly disrupt and damage any credit that the debtor has built. This can be hard to recover or improve following bankruptcy filing, as the Chapter 7 filing can stay on your credit reports for up to ten years following the date of the filing. A completed Chapter 7 case can stay on your credit reports for up to seven years following the date of completion. This, within itself, is enough to discourage some people from filing for Chapter 7 bankruptcy.
Although bankruptcy can be very emotionally and financially draining, it is important to know that, for many people who are in dire need financially, filing is their only option. When bills pile up and the debtor is unable to make payments, filing for Chapter 7 bankruptcy may be the most efficient way to reset their financial career. It is also important to know that, while it may seem daunting, it is very possible to focus on rebuilding finances and assets, so that the debtor does not find him or herself back in the same financial situation down the road.
Ruesch & Reeve Law Firm
The lawyers at Reusch & Reeve Law Firm are here to help you during this trying time. Contact us today about your case, our team is working and offering consultations via phone, email, and video conferencing.
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Hurricane, Utah 84737