Chapter 7 Bankruptcy
Without question the most common type of bankruptcy is Chapter 7. The vast majority of cases filed nationwide are Chapter 7, although the percentage of Chapter 13 cases is steadily climbing. The Bankruptcy Code refers to Chapter 7 as the “liquidation” Chapter, but that title is rather misleading. Most Chapter 7 cases are what we call “no asset” cases which means there is in fact no liquidation of ANY of the debtors property. This is typically because most of the debtor’s assets are either “exempt” (we’ll cover exemptions later) or of inconsequential value and liquidating them wouldn’t bring any meaningful payout to creditors. Chapter 7 should always be the first option you look at when considering seeking bankruptcy relief from your debt and creditors. The main reason for that is that Chapter 7 is fast! You are in and out of bankruptcy typically in about 4-5 months. The other reason is that, compared to other chapters, Chapter 7 is cheap. There’s typically no payment to creditors. Attorneys fees are less. The total cost is less than other chapters. For most people the goal, the finish line if you will, of a bankruptcy filing is to get to that Discharge and in Chapter 7 you get there fast (and often cheap), which is why it’s such a popular option.
Any individual who resides, is domiciled or has property in the US may file for Chapter 7. You do not have to be a US citizen to seek relief under Chapter 7. Legally married same-sex couples can file a joint bankruptcy. A corporation may file for Chapter 7, however, a corporation is not eligible for a Discharge in Chapter 7 (we’re going to cover the Discharge later). Any individual who files must have received a credit counseling class within the 180 days prior to filing. This isn’t a big deal: $20 and an hour on the Internet will get you your counseling certificate. There’s a unique limitation to filing any bankruptcy case if you were a debtor in a prior bankruptcy case in the last 180 days and failed to abide by a court order or requested a voluntary dismissal of your case. This is unusual but it does happen and there are rules in place designed to keep people from jumping in and out of bankruptcy cases.
Now, just because you filed a Chapter 7 doesn’t mean you always get to stay in Chapter 7. Sometimes, the US Trustee (UST) or a creditor will come along and try and kick you out of Chapter 7 if your income is above certain levels. Or, sometimes, the debtor chooses to leave Chapter 7 if things start to get a little uncomfortable, and that typically involves the bankruptcy Panel Trustee (not the UST) coming after assets of the debtor when the debtor might have thought those assets would be protected. Another factor to consider is whether the Debtor is eligible for a Discharge. I cover the Discharge in greater depth below but basically the Discharge is the Court Order that wipes out certain debts. If you’re not eligible for a Discharge, it typically doesn’t make a lot of sense to file a case under Chapter 7. You can’t get a Discharge in Chapter 7 if you already received a Discharge in Chapter 7 (or 11) in the past 8 years OR you already received a Discharge in Chapter 13 in the last six years.
When first considering Chapter 7 the questions you need to ask are: Am I eligible to file a 7 AND get a Discharge? (prior bankruptcy filings can keep you out of a 7, AND income above certain thresholds can also keep you out of a 7). The next question to ask is does Chapter 7 make sense for me? There are a lot of reasons why Chapter 7 might not be the best option. If you have assets above certain exemptions levels, Chapter 7 may NOT be the right option as your risk losing those assets! Will Chapter 13 provide you greater relief from your creditors? Chapter 13 is frankly a much friendlier place to be and for a lot of people the expanded protection under Chapter 13 makes a lot more sense than Chapter 7.