Bankruptcy FAQs

In my daily practice, I am often confronted by a stream of questions regarding Chapter 7 bankruptcies. This topic can be one of great mystery to potential filers, but it need not be. If you are a debtor who is contemplating a Chapter 7 bankruptcy, there is a wealth of information available – much of it for free – which will assist you in learning about this process, and making sound decisions. Below are some of the most common questions I receive, with accompanying answers.

Just what is Chapter 7 bankruptcy?

• While there is much that can be said about Chapter 7 bankruptcy (many whole books have been written on the subject), in a very general sense, Chapter 7 bankruptcy is a form of bankruptcy which allows a debtor to put an immediate stop to all collection activities, and ultimately, extinguish (or “discharge”) many or all of their debts.

How does Chapter 7 bankruptcy differ from Chapter 13?

• There are numerous differences between Chapter 7 and Chapter 13 bankruptcies. However, the primary differences of concern to most clients are as follows:
  • Chapter 7 gives a debtor the opportunity to extinguish many or all of their debts, while Chapter 13 typically compels a debtor to set up payment plans with his or her creditors, and pay off the debts over the course of 3-5 years;
  • Chapter 7 attorney’s fees are usually much lower than those for Chapter 13;
  • Chapter 7 bankruptcies tend to be simpler, more straightforward, and last about 3 months, while Chapter 13 bankruptcies are often more complex, and, as stated above, can last from 3-5 years

Are there eligibility requirements for Chapter 7? What are they?

• There are eligibility requirements for Chapter 7 bankruptcies. Potential filers need to first take what is known as the “means test.” This will determine whether the debtor makes under the maximum income allowed to qualify for bankruptcy. The means test is in place to prevent potential abuse of the bankruptcy process by individuals who are trying to have their debts discharged, but are actually in a financial position to address or resolve those debts. Means tests vary by state, so be sure to use an appropriate test for your jurisdiction. Right now in Indiana, in order to qualify, a debtor must make about $45,000 or less for a one-person household, about $55,000 or less for a two-person household, about $65,000 or less for a three-person household, and about $75,000 or less for a four-person household. You can view exact totals (and see the limits for larger households) here: https://www.legalconsumer.com/bankruptcy/means-test/state.php?st=IN. Be aware that the income thresholds change from time to time in each state, so check your local laws to ensure that you are using the most up-to-date numbers.

What if I don’t qualify for Chapter 7 under the means test?

• If you do not qualify directly under the means test, then in most instances, you will have several remaining options. Some of those options might include: going through all of your information and making sure you have accounted for everything correctly, and then taking the means test again; finding additional exemptions that might make you eligible; filing for Chapter 7 anyways, with the increased scrutiny that comes with a failed means test; opting to file a Chapter 13 bankruptcy, instead; or, waiting until your situation changes so that you can pass the means test. Given the potential for complexity here and the uniqueness of each case, it would be a good idea to sit down with an experienced bankruptcy attorney to weigh your options in this situation.

How much does a Chapter 7 bankruptcy cost?

• There are several different expenses you’ll encounter with the typical Chapter 7 filing. The most common are the following:
  • Chapter 7 court fees, which total $335 at the time of this writing;
  • Two finance-related courses which are mandated as part of the process, which cost, in total, about $40;
  • Attorney’s fees, which typically range from $500-$2,000;
• Other fees and costs that might crop up in a Chapter 7 could include costs to obtain personal or financial records from accountants, the government, etc.; copying and printing costs; travel or missed time from work, etc. However, the costs noted above will usually account for 90% of all the costs incurred in a typical Chapter 7.

How much do attorneys charge for Chapter 7 bankruptcies?

• As noted in Question #5, the fees of different attorneys can vary widely. Most bankruptcy attorneys will charge anywhere between $500 and $2,000, with the vast majority of those attorneys falling somewhere between $700 and $1,500. A minority of attorneys publish their pricing via websites or other materials, making it easy for potential clients to know their fees. Although most attorneys don’t do this (for a number of reasons), many do offer free consultations, where they will sit down with you, discuss the specifics of your case, and give you the fee they would charge for taking it on.

What is the process for a Chapter 7? How long does the process take?

• Each Chapter 7 is different, but in general, the process will look something like this:
  • After signing on with your attorney, you will collect certain required items like tax returns, bank statements, etc., fill out several forms for your attorney, and take your required credit counseling course (estimated 2-4 weeks);
  • Once you have everything collected and complete, you will return them to your attorney, who will then fill out your official forms and submit them to the court (1-2 weeks);
  • Once your bankruptcy filing is submitted, the court will set what’s known as a “341 Meeting” or “Meeting of the Creditors,” which you will attend roughly 30 days after the filing of the petition (4-5 weeks);
  • After the completion of your 341 Meeting, you will take another course – a financial management course – and submit that certificate to the court (1-2 weeks);
  • Assuming all goes well during the 341 Meeting, the trustee will issue a clearance report, after which creditors will have about sixty days to object to the discharge of your debts (7-8 weeks);
  • If no creditor objects to your bankruptcy, and the court does not find any issues, you should receive your discharge soon after the deadline for objection passes (1-2 weeks).
• Most bankruptcies, from initiation to discharge, last in total between 3-4 months.

What are “exemptions”?

• Exemptions are certain protections based in state or federal law, that determine what property you will be able to keep in a bankruptcy. Speak with an experienced bankruptcy attorney to find out what laws apply to exemptions in your local jurisdiction, and also to see what exemptions you might be eligible for.

If I file, can I keep my house?

• As with most questions in bankruptcy, the answer is, “it depends.” If you are buying your home, and are current on your mortgage payments, then typically it’s not too difficult to protect your home under one of the bankruptcy exemptions offered. However, if you’re significantly behind on your payments, protecting the home – while not impossible – is somewhat more difficult, and would depend on the specifics of your situation. Often the best solution for someone in that position is to file for Chapter 13, rather than Chapter 7. If you are renting your home, your chances of being able to stay in the home are typically very good.

Can I keep my car?

• In most situations, keeping a car is within the debtor’s power. Most debtors will be able to claim their car as an exemption under the relevant state or federal laws. Retaining a vehicle with an outstanding, active loan will require that you “reaffirm” the loan (i.e., notify the trustee and the lender that you intend to continue being obligated under the loan and making payments on it).

What else can I keep under a Chapter 7 bankruptcy?

• This will depend on your state’s particular bankruptcy laws. However, in many cases, some normal items of personal property (e.g. electronics, furniture, clothing) will be eligible for exemption. However, every situation is unique, so be sure to speak with an experienced bankruptcy attorney for more detailed information on your specific circumstance.

How will a Chapter 7 affect my credit?

• A Chapter 7 bankruptcy will likely have – at least in the short term – a heavy negative impact on your credit. Your credit score will likely see a significant drop, initially. However, many bankruptcy filers can begin to clean up their profiles and improve their scores in a reasonably short period of time. The use of secured debt and other tools can help in achieving this objective. Additionally, debtors who choose not to pursue bankruptcy, but rather elect to keep their debts open, run the risk of having those debts reported on their credit reports for years. This can be as damaging – if not more damaging – than actually filing for bankruptcy and having the debts discharged.

What is an automatic stay?

• An automatic stay is a “hold” that goes into effect after the filing of a bankruptcy petition. The automatic stay prohibits any creditor from taking collection activity against a debtor for a period of time, to allow the debtor some breathing room, and to allow the court and trustee time to sort things out on the debtor’s case.

What if I have lawsuits pending?

• Typically, if lawsuits against you are pending, they will be put on hold as a result of your bankruptcy’s automatic stay. No further hearings or other activity will be permitted while the stay is in place. You are required, however, to list any pending lawsuits in your initial bankruptcy filings.

Does Chapter 7 get rid of taxes?

• Generally, a Chapter 7 bankruptcy does not clear a debtor of tax obligations. However, there are some exceptions. Speak with an experienced bankruptcy attorney for more details on your specific situation.

Does Chapter 7 get rid of domestic obligations such as alimony and child support?

• Generally, a Chapter 7 bankruptcy does not clear a debtor of “domestic support obligations,” such as child support or alimony.

Does Chapter 7 get rid of student loans?

• Generally, a Chapter 7 bankruptcy does not clear a debtor of most student loan obligations. However, there are some exceptions. Speak with an experienced bankruptcy attorney for more details on your specific situation.

Are there any other types of debts that won’t be discharged under a Chapter 7 bankruptcy?

• Yes, the bankruptcy code lists a number of other debt types that are non-dischargeable, including restitution owed for breaking the law, and debts arising from a death or injury you caused as a result of intoxicated driving. Speak with an experienced bankruptcy attorney for more specific details regarding what cannot be discharged.

What does get discharged under a Chapter 7?

• Pretty much everything not categorized as non-dischargeable under the Bankruptcy Code. For most people, this would include credit card debt, debts arising from leases and contracts, medical bills, judgments, debts arising from most car accidents, etc.

What is a 341 Meeting or a “Meeting of Creditors”?

• A 341 Meeting, or “Meeting of Creditors,” is a meeting held between a trustee, the debtor who filed the bankruptcy, and any creditors named in the bankruptcy petition who wish to attend. The meeting is a chance for the trustee to dig deeper into your petition, learn about any issues of concern, or press you for answers to questions he or she may have about your situation. It is also, in theory, an opportunity for creditors to attend and ask you questions about your property, finances, etc. In practice, 341 Meetings tend to be quite short (ten minutes or less), with a trustee briefly going over major aspects of your bankruptcy filing, and checking for inaccuracies or questionable submissions. Creditors almost never show up to these meetings. Although red-flag issues in your filing could lead to a more in-depth interview, in most cases debtors get through with little problem, and are on their way within a few minutes.

What are the credit counseling and financial management courses?

• These are courses which bankruptcy filers are required to take over the course of the bankruptcy process. The first course is called the Credit Counseling Course, and it teaches debtors about the proper use and management of debt. This course must be completed before the bankruptcy filing is initiated. The second class is called the Financial Management Course, which helps debtors establish essential personal finance skills. This course must be completed within sixty days of the first date set for the Meeting of Creditors. Both courses are available online through various providers approved by the U.S. Bankruptcy Courts, and typically take about an hour to complete. The costs range from $10-$25 per course. A comprehensive list of approved courses can be found here: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111

What if I forget to list one of my debts?

• Debts left off of the initial petition can be added later by amending the creditor list.

Can I convert my Chapter 7 bankruptcy to a Chapter 13?

• In some circumstances (e.g., you have a sudden, substantial increase in income), yes you can. Speak with an experienced bankruptcy attorney for more specific details regarding a conversion from Chapter 7 to Chapter 13.

NOTE
All legal references are made with respect to Indiana law. Please check the laws of your local jurisdiction if you live in another state.
The articles in this blog are for informational purposes only. No attorney-client relationship is established through the publication of these articles.