Chapter 7 is often considered the most straightforward kind of bankruptcy, one in which you often have the best chance for a fresh start; but despite what many people believe, it does not automatically mean you will lose your home, your car and your retirement savings.
You Can Usually Eliminate The Following Types of Debts
- Credit Card Debt
- Medical Bills
- Unsecured Loans
- Lines of Credit
- Foreclosure Deficiencies
- Repossession Deficiencies
- Most Judgments
- Some Taxes
However, in Chapter 7 bankruptcy you must continue making your payments on your secured debt on such property as a car or home loan unless you want to give the property back to the lender.
In order to qualify for Chapter 7 bankruptcy, you need to establish that you are unable to repay your debts. The law presumes that you are able to repay your debts if you are unable to pass a “Means Test” which involves a series of calculations that are designed to identify whether you can pay back a significant portion of the debts to be eliminated. The court will also consider whether you have acted in good faith. For example, misconduct, such as, fraudulently obtaining credit or not properly accounting for all of your income or property can also prevent you from qualifying for bankruptcy. As part of the qualifying process, the law provides that you must testify under oath at a meeting of creditors conducted by a court appointed trustee. The trustee is charged with making sure you are complying with all of the bankruptcy laws as well as determining whether or not you have any non-exempt assets that must be sold as part of your bankruptcy in order to repay your debts. So that your case may be expeditiously handled you will be required to provide your assigned trustee various documents in advance of your hearing. A list of these documents and other San Diego U.S. Trustee bankruptcy requirements may be found in the U.S. Trustee Guidelines – San Diego (PDF). The creditors may also appear at the meeting of creditors and ask you questions regarding the nature and location of your assets.
Once your case is filed under chapter 7 it “automatically stays” (stops) most collection actions against you or your property. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, your creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk will give notice of your bankruptcy case to all creditors whose names and addresses that have been provided to the court.
If you have complied with all of the laws at the end of your bankruptcy case the court will grant a discharge of your debts. The bankruptcy court’s discharge releases you from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, you should consult with your attorney before filing to discuss the scope of the discharge. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors. Fed. R. Bankr. P. 4004(c).
The grounds for denying an individual debtor a discharge in a chapter 7 case are narrow and are construed against the moving party. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failed to complete an approved instructional course concerning financial management. 11 U.S.C. § 727; Fed. R. Bankr. P. 4005.
Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as an automobile), he or she may decide to “reaffirm” the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the debtor continues to pay the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court. 11 U.S.C. § 524(c). The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures described in 11 U.S.C. § 524(k). Among other things, the disclosures must advise the debtor of the amount of the debt being reaffirmed and how it is calculated and that reaffirmation means that the debtor’s personal liability for that debt will not be discharged in the bankruptcy. The disclosures also require the debtor to sign and file a statement of his or her current income and expenses which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement. Unless the debtor is represented by an attorney, the bankruptcy judge must approve the reaffirmation agreement.
If the debtor was represented by an attorney in connection with the reaffirmation agreement, the attorney must certify in writing that he or she advised the debtor of the legal effect and consequences of the agreement, including a default under the agreement. The attorney must also certify that the debtor was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the debtor or the debtor’s dependants. 11 U.S.C. § 524(k). The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. 11 U.S.C. § 524(d) and (m). The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists. 11 U.S.C. § 524(f).
An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case. A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. But not all of an individual’s debts are discharged in chapter 7. Debts not discharged include debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders. 11 U.S.C. § 523(a). The debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).
The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud by the debtor, if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee, or if the debtor (without a satisfactory explanation) makes a material misstatement or fails to provide documents or other information in connection with an audit of the debtor’s case. 11 U.S.C. § 727(d).