(3 votes, average: 4 out of 5)
Loading ...What Happens in a Chapter 7 Bankruptcy Proceeding?
First you file for bankruptcy. You fill out a petition and several other forms that ask about your income, debts, and property and file them with the court. It costs about $150 to file (single or a married couple). If you can’t afford the fee, you may be allowed to pay it in installments, or may even get it waived. Attorney’s fees will typically run anywhere from $500 to $3,000, depending on your case. Shortly after you file, you are given a court date, and your creditors are notified that you have filed.
Many consumers are very relieved after filing. They don’t have to endure nasty calls from debt collectors anymore—they can just tell them they have filed for bankruptcy.
Next, you go to court for the “meeting of the creditors.” The name is deceptive, because creditors are unlikely to show up unless they plan to challenge your petition. Instead, you will meet with the trustee (the person the court appoints to administer your bankruptcy), who will go over your plan to determine if it is acceptable.
After the meeting of the creditors, the trustee will arrange to collect and sell your nonexempt property (I’ll talk about that in a minute) and divide the cash among your creditors. If you can come up with the cash value of property you want to keep, you may be allowed to hold on to it. Or you may be able to exchange exempt property for nonexempt property.
Typically, your bankruptcy is discharged within three to six months of when you filed. This is the final act of the court, which clears you from your debts. You might have to go to court for a discharge hearing, but more likely you’ll be notified by mail of the discharge. After your bankruptcy has been discharged, creditors generally cannot try to collect any unpaid debts from you— except, of course, for debts that weren’t discharged.
What Can You Keep?
When you file Chapter 7, you basically “wipe out” most debts after giving up some of your property. The property you get to keep is called “exempt” property. There are basically two types of rules that determine what you get to keep: state exemptions and federal exemptions. If you live in Arkansas, Connecticut, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Washington, Wisconsin, or the District of Columbia, you can choose whether you want to file under federal exemptions or your state’s exemptions. (Federal exemptions are usually better.) California filers have two state exemption lists to choose between. Everywhere else, you can only file under the state exemption schedule.
Exemptions vary widely. If you live in Florida, for example, your entire home equity is exempt under most circumstances. In Maryland, on the other hand, none of the value in your home is exempt. Under the federal exemption, up to $15,000 in home equity is exempt. Under Chapter 7, you will erase most of your debts, but you’ll still be responsible for:
- Secured loans
- Court-ordered child support and alimony
- Most student loans (except in cases where it is determined by the court that paying these loans would cause undue hardship to you or your dependents)
- Most federal, state, and local taxes
- Debts for personal injury or death caused by intoxicated driving
- Court-ordered restitution imposed in a criminal case
If you want to keep property that is not exempt from bankruptcy, you can usually do it in one of three ways:
- Reaffirm the debt. Suppose you have a car on which you owe $1,200, and none of the equity in the car is exempt. You need the car to get to work so you make a legal arrangement with the creditor to pay off all or part of the debt during bankruptcy. This is called “reaffirming” the debt.
- Pay for it. Suppose you want to keep a family heirloom that is worth $500. If you can get cash from a friend or relative to pay for it, you will probably be able to “buy” it back.
- Trade it for exempt property. In some cases, you are allowed to trade the value of nonexempt property for exempt property.
You must be employed or have a regular income (such as alimony, pension, support, or government benefits) to be eligible to file Chapter 13 bankruptcy. Your secured debts can’t total more than $807,750 and unsecured debts cannot total more than $269,250.
Under Chapter 13, you formulate a plan to pay back some or all of your debts. You and your attorney will design your plan based on your income and debts, but in general, the requirements are as follows:
For unsecured debts, you pay back at least as much as the creditor would have received if you had filed Chapter 7.
For secured debts, you pay back at least the amount of the claim that the creditor agrees to accept, or you surrender the collateral to the creditor.
Certain debts such as taxes and child support must be paid in full.
If any creditor or other party objects to your plan, you must commit all your disposable income for three years to paying back your debts or pay back all your unsecured debts in full.
What Happens When You File for Chapter 13?
Similar to a Chapter 7 case, you will file for Chapter 13 by filling out forms describing your income, assets, and debts. You will also fill out a form describing your plan for paying back your debts over the next few years. You will pay a filing fee of about $150 when you file (same for married couples). If you can’t afford the fee, you may be allowed to pay it in installments, but it will not be waived.
Soon after you file, the court will notify you of the meeting of creditors, at which time you will meet with the trustee (not a judge) and any interested creditors. Unsecured creditors rarely attend this meeting, but secured creditors may, especially if they disagree with a value you’ve assigned property. The trustee will go over your papers and ask questions about your plan and the papers you filed.
The same day, or within a few weeks, a confirmation hearing will be set. At this time, the court decides whether to accept the plan, and if so, “rules on confirmation.” Once your bankruptcy plan is confirmed, the trustee will begin payments to your creditors. (You pay the trustee, not your creditors.) During the three years or so, as long as you make your payments, you’re pretty much free to conduct your financial life as you wish.
If you meet the requirements of your plan, your bankruptcy will be discharged and your case closed.
There are a couple of differences between Chapter 7 and Chapter 13 that you should be aware of:
Cosigners: If you have cosigners on accounts who are not filing with you, under Chapter 7 the creditor can go after them almost immediately for payment. Under Chapter 13 your creditors cannot try to collect from cosigners until after it has been determined that you will not be able to pay back the debt in full—usually that’s when your case is over.
Fraud: Under Chapter 7, if a lender can show that the information you gave in your application was false, or you otherwise fraudulently obtained credit, they can try to exclude that debt from your discharge. Credit card issuers in particular are getting more and more aggressive about this, and are looking to stop anyone who might have been on a recent spending spree from just wiping out their debts. Under Chapter 13, they usually must wait until you have completed the repayment plan before they can try to demand payment of the full debt.
Waiting Period: Chapter 7 can be filed every six years. Chapter 13 can be filed as often as you want (as long as the previous bankruptcy has been discharged).
Most consumers, over 80 percent of them, choose Chapter 7 rather than Chapter 13. Unfortunately, there isn’t much incentive for consumers to file Chapter 13 rather than Chapter 7. Few creditors differentiate between the two when evaluating postbankruptcy applications for credit: Either type of bankruptcy can mean an automatic credit rejection. It’s true that most credit bureaus will now remove a Chapter 13 bankruptcy from a credit report seven years from the date of filing, while Chapter 7 stays on for ten years from the date of filing. Still, for some people that may not seem like a great incentive to go through a Chapter 13 plan.
Note that even if you file for bankruptcy and don’t go through with it, the fact that you filed for bankruptcy will appear on your credit file for up to ten years and may harm your chances of getting credit elsewhere. Don’t use filing for bankruptcy as a way to scare a creditor into agreeing to a reasonable payment schedule.