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Chapter 7 Bankruptcy

When you file a chapter 7 bankruptcy your 341 hearing is set and you attend with your attorney about 30 days later. Usually, you are filing a chapter 7 bankruptcy to discharge debt because you cannot afford to repay it. You still….I repeat…..you still have to pay for debts when a creditor has a lien on something you want to keep. These are called secured debts and the creditors have liens on your property, or collateral. Prime examples of these types of debts are your home mortgages or deeds of trust and your car loans. If you want to keep these items you have to pay for them. And you have to be current on the payments at the time you file bankruptcy or the bank may take the car or foreclose on the house.

Generally, you file your chapter 7 bankruptcy, go to the hearing and the bankruptcy trustee asks questions.  Usually, no creditors appear. Your attorney is there to make sure don’t stumble and to clarify anything that isn’t clear at the end. Also, he will probably make notes of anything that needs to be obtained for the trustee. Different bankruptcy courts operate differently and different bankruptcy trustees have different expectations of you. Your attorney should know these differences and be able to tell you what to expect. In all jurisdictions, there are things which, if you do not have them to the trustee’s office before 7 days prior to the meeting of creditors, they will not have your hearing. The list is subject to change.  For example, in SC you must send your last 3 months bank statements and 2-3 years tax returns to the trustee before the hearing or he can continue the hearing. The trustees also ask for other information before the hearing on a case-by-case basis. In the Western District of NC the bankruptcy trustees require only the tax returns and photo id/social security card, unless there are assets.

The chapter 7 bankruptcy trustee has 4 basic jobs: (1) to make sure that you filed all your paperwork correctly and completely; (2) to confirm that the budget you filed is real and shows that you and your family have no disposable income after you pay your basic, ordinary average monthly living expenses; (3) to confirm that your family’s “Current Monthly Income”, or CMI is less than the median family income of a family of your size in the county and state in which you live and, if it is higher than the median income, then review the Means Test (a/k/a Form B22) you had to fill out because you were above median income, to see if you pass the Means Test.

The CMI is a made up number Congress came up with under the new bankruptcy law in 2005, and which consists of the gross income of and all funds of any type received by everyone living in your house for the six months immediately prior to the month in which you filed bankruptcy (except for some types of income!). This number is then divided by 6 and multiplied by 2.

The median family income is a number which comes from IRS statistical records. If you do your paperwork correctly, and you have no money left after you pay your ordinary and reasonable living expenses; and your household’s current monthly income is less than the median family income for a family of your size, THEN you qualify for chapter 7 bankruptcy and the bankruptcy trustee will say so. Of course, your file is also being reviewed by the US Trustee to see if it complies, but this rarely is a problem for those people who have experienced attorneys and who provide their attorneys with all the requested information prior to filing.

If your family makes more than the median family income then you have to complete the Means Test and pass it in order to be able to file chapter 7. You can fail even if  your budget shows that you have no extra money left. The expenses are those of the IRS’s based on average expenses, not necessarily yours. For example, there is a housing expense on the Means Test. If you pay a huge mortgage payment that is three times what other folks in your income bracket are paying relative to what you could pay in rent or reasonable (“IRS reasonable”) mortgage payments, then you may fail the means test even though it feels like you are barely making it….but it’s because of your housing costs.

Finally, the chapter 7 bankruptcy trustee’s fourth job is to see if those people who qualify for chapter 7 bankruptcy have any assets he can sell. This rarely occurs because everyone has a certain dollar amount of certain types of items that are protected from bankruptcy trustees. These are called exemptions and are discussed herein. Most people filing chapter 7 bankruptcy do not have assets which are worth much more than their exemptions. Your attorney should be able to advise you regarding how to protect your assets. If you do not claim the correct exemptions, your assets may be sold. Every experienced bankruptcy attorney and bankruptcy trustee can recall cases where people without lawyers or people with lousy lawyers lost assets that could have been protected.

If the bankruptcy trustee does not want your assets, he usually will say so at the end of the hearing in SC. (In the Western District of NC, they frequently do not say this at the hearing). After the 341 meeting of creditors, then you only need to wait approximately 60 days after the 341 meeting of creditors, or hearing, for the deadline for creditors to object to their particular debt’s being discharged or wiped out. Creditors cannot object to discharge just because they are irritated. They have to have a legal reason, such as you lied to them about something important like your income in order to qualify for the loan they gave you; or you borrowed money from them within 90 days before you filed bankruptcy. Creditors have to sue you in the bankruptcy court to object to discharge. If they do not then, even if they could have complained and won, they no longer can if they miss the deadline.

Usually within a month after the deadline to object to discharge passes, you get your order discharging debtor. This is the piece of paper, or court order, signed by a bankruptcy judge, which wipes out or discharges your debts. What does it say and do? It does not tell anyone what debts are discharged. Typically, it merely says that the debtor is discharged of the obligation to pay all dischargeable debts and the bankruptcy case is closed. The attorney and debtor have to know which of the debtor’s debts are actually dischargeable. Creditors need to understand this, too, because if a creditor tries to collect a dischargeable debt, then he can be sued and it can be a very expensive mistake.

What is a dischargeable debt? The bankruptcy code does not specifically itemize them. Instead, the bankruptcy code says what debts are not discharged, with the presumption being that all debts are discharged unless the bankruptcy law says they are not. Some examples of debts that specifically are not discharged are: some taxes, alimony and child support, most school loans, debts incurred through fraud, and others.

In most chapter 7 bankruptcy cases debtors discharge all of their debts and keep paying the creditors they want to keep paying, which debts usually are the mortgage on the house and the car payment. All of these payments need to be made on time or the banks can take their collateral according to whatever their rights are under the law of the applicable state.

  • Learn More About Bankruptcy

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