Can I File Under Chapter 7?

When most people think of "bankruptcy", they are thinking of a bankruptcy proceeding filed under Chapter 7 of the United States Bankruptcy Code. Sometimes this is called "straight bankruptcy." The purpose of a Chapter 7 bankruptcy is to eliminate or to "discharge" debts. This page explores the financial requirements a person has to meet in order to be able to file under Chapter 7, some of the benefits and disadvantages to filing under Chapter 7, what types of debts you can usually discharge and other frequently asked questions.

Can I File Under Chapter 7?

Under the new law a person who wishes to file a Chapter 7 case must financially "qualify", so to speak. The analysis that is involved usually is referred to as the "means test." The first step in this process is to compile your income for the six month period prior to the date of filing. For example, if the date of filing is during the month of September, the income that must be compiled is what has been received during the months of March through August. "Income" is very broadly defined, and includes such items as wages, dividends, gifts and contributions from other persons in your household. Indeed, the only exclusions mentioned in the Bankruptcy Code are Social Security payments and certain payments made because you have been the victim of certain crimes. The total "income" then is divided by six in order to arrive at what is referred to as the "current monthly income." If this current monthly income is under the state median income for the parish in which you reside, taking into account how many people there are in your household, then you have "passed" the means test, and you are eligible to file Chapter 7. If your income is over the median income, you still might be able to file, but it is then necessary to examine your expenses in order to see if they are sufficient to bring your net income below the threshold amount. Some of these expenses are not your actual expenses, but instead involve national or state standards. Needless to say, the analysis can become extremely complicated and detailed.

Are All Debts Eliminated in Chapter 7?

The chief advantage and principal goal of a Chapter 7 bankruptcy is that after the discharge you will not owe any debts. However, there are important exceptions to this of which you should be aware. Some of these are the following. As always, however, please consult an experienced bankruptcy attorney before concluding that any particular debt in your situation will or will not be discharged:

Income taxes: Unless income tax liability is old enough, it is not dischargeable. Generally, in order to be dischargeable, this kind of debt must be for a taxable year for which the return was due more than three years go, with the return being filed over two years ago, and with the date of assessment being more than 240 days ago. There are some things that can increase this time, for example, offers in compromise and previous bankruptcies. In order to determine whether a tax is dischargeable, detailed analysis must usually be made.

Student loan debt; This kind of debt, if it was made or guaranteed by a governmental agency or a nonprofit institution, is not dischargeable unless you can show "undue hardship". To prove undue hardship you have to prove (1) that you cannot maintain, based on current income and expenses, a "minimal" standard of living for yourself and your dependents if forced to repay the loans; (2) that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that you made good faith effort to repay the loans. It is extremely hard to meet this burden of proof.

Debts incurred by false representation or fraud: One very frequently litigated issue in this area concerns credit card debt. Commonly, the situation is that the debtor has made sizable charges on the card shortly before filing the bankruptcy petition, suggesting that the debtor has "loaded up", knowing that he or she is going to file. Normally, the burden of proof lies with the creditor, meaning that the creditor must prove that the debtor has committed fraud. However, the Bankruptcy Code provides that any credit card debt aggregating more than $500.00 from any single creditor for nonessential, "luxury" goods incurred within 90 days prior to filing the bankruptcy, or cash advances totaling over $750.00 on a credit card, taken within 70 days prior to filing, are presumed to be non-dischargeable. The effect is that the burden is on the debtor to show that the charges were not fraudulent. This particular provision of the Bankruptcy Code simply sets forth a presumption of fraud. It does not mean that if you wait more than 70 or 90 days, as the case may be, you are automatically free from an objection to discharge, nor does it mean that if you file the bankruptcy within the 70 or 90 day period that the debt will not be discharged. To avoid possible problems, which is one of my goals as a bankruptcy attorney, do not use your credit cards for anything other than food, clothing and other essentials during the applicable period. Really, it is best not to use them at all.

Alimony and Child Support: This kind of debt cannot be discharged under any circumstance. Also, if a debt has been incurred in the course of a divorce, even if it is not alimony or child support, under the changes in the law, it is not dischargeable. For example, if you have agreed to pay a certain debt in a property settlement agreement, that debt is not dischargeable!

Injury caused by an intoxicated debtor's operation of a motor vehicle: The Bankruptcy Code provides that not dischargeable is a debt "for death or personal injury caused by The debtor's operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance."

Other exceptions to discharge: There are other categories of debts that are "excepted" from discharge. Space does not permit full discussion of all of these exceptions. When you discuss your situation in detail with your attorney, you will be advised of any other exceptions that may be applicable. It may be that you may have one or more debts that are not dischargeable in Chapter 7, but are dischargeable in a Chapter 13. For example of the exceptions discussed above, those involving fraud and intoxicated operation of a motor vehicle are dischargeable in a Chapter 13. Of course, this may have a bearing on which Chapter you file.

Do I Have To List All Debts? Yes, you do, even though you may not want to. Clients often tell me that for some reason they do not wish to list a creditor. Sometimes they indicate that they are current with their payments with a creditor, maybe a home mortgagee or a car lender, and do not wish to disturb their good relationship with the creditor. I have to advise them that the Bankruptcy Code requires that all debts be listed.

This does not necessarily mean that the relationship with the creditor will be damaged. If the creditor has a security interest in some property, such as your home or vehicle, usually the creditor and debtor enter into a "reaffirmation agreement." This is a special document which is also signed by your attorney and is filed with the court. The effect of the reaffirmation agreement is to again make the debtor legally responsible for the debt.

The creditor usually is very happy to enter into this agreement. After all, the creditor would much rather have you pay the debt than to go to the expense and hassle of seizing and selling the collateral, usually at a loss. If the debt is an "unsecured" debt, meaning that there has been no property pledged to "secure" the debt, it almost always is not advisable to reaffirm the debt. The reason for this is that there is no benefit such as retention by the debtor of secured property to justify the reaffirmation of the debt. To reaffirm the debt, and consequently to be obligated to repay it, prevents a true "fresh start", which, after all, is the purpose of filing a Chapter 7 bankruptcy. Having said that, however, the Bankruptcy Code allows you to pay any debt on a voluntary basis, if you wish to do so. Whether this is advisable is questionable and is an issue to be discussed with your attorney.

Can I Lose Property In A Chapter 7? As is true under any Chapter of the Bankruptcy Code, you are required to list all of your assets (and, as mentioned above, all of your debts) in the "schedules" filed with the court. An asset is any property you own or may have a right to own in the future. It could be "tangible", such as a vehicle, or "intangible", such as a legal claim or the right to receive a tax refund. Your assets become the property of the bankruptcy estate. In general, any property that you acquire after the date of filing the bankruptcy petition that you were not entitled to receive prior to filing is not included in the bankruptcy estate. One notable exception to this rule is inheritance rights; if you inherit property within 180 days of filing, that inherited property is considered part of the bankruptcy estate.

In a Chapter 7 bankruptcy, the trustee, who is a person appointed to take charge of the bankruptcy estate, can, if necessary, sell the property which is not exempt from seizure, and then pay creditors. It is very important, then, to identify in the schedules what property is protected as exempt. At least some, and perhaps most, of your assets will be exempt. In Maine, state law, not federal law, governs which property is exempt. It is not possible to fully cover all of these exemptions here; however, some important exemptions include the following:

Homestead. This important exemption protects up to $35,000 to $70,000 of equity in your home.

Household goods. Most of the items in our home that we use for our support and maintenance are included in this category. Examples are clothing, furniture and appliances.

Retirement funds. There are actually two layers of protection when it comes to retirement funds. The first is not really an exemption, but rather, is a decision by the United States Supreme Court in the landmark case of Patterson v. Shumate that retirement funds that are "ERISA approved", meaning basically that they cannot be transferred to another person, are not even included in the bankruptcy estate. Thus, they cannot be administered by a trustee. The second layer of protection is a Maine state law that exempts 401K plans, Individual Retirement Accounts (IRA) and similar plans from seizure, to the extent reasonably necessary to support the Debtor and the Debtor's dependents. Needless to say, this is a most important issue for many people, and consultation with an experienced bankruptcy attorney is a must.

Tools of the Trade. This $5,000.00 exemption covers property which we need to use in our work A carpenter's tools, for example, are exempt from administration by the trustee to the extent they do not exceed $5,000.00 in value. There may be additional protection under appropriate circumstances.

Motor Vehicles. Frequently, the question arises whether motor vehicles are exempt. In Maine, we are entitled to a $5,000 exemption for one motor vehicle per Debtor.

What Are The Disadvantages Of Filing Chapter 7? Although a Chapter 7 discharge is a powerful remedy and offers a financial "fresh start", there are some drawbacks which must be considered. One is that the bankruptcy filing will be included in your credit record for up to 10 years. Any prospective creditor can be expected to obtain your credit report in deciding whether to extend credit, and to include as a factor the bankruptcy filing. How much will the bankruptcy hurt your chances of getting credit in the future? In order to answer this question, one issue will be what condition your credit record was in at the time of filing bankruptcy. If, as sometimes happens, your credit is excellent up until the time of filing, then the bankruptcy can be expected to be damaging. However, if the credit record is not good, the bankruptcy filing will be less damaging, and actually may be of benefit to your creditworthiness. Credit lending agencies know you won't be able to file another Chapter 7 bankruptcy for at least 8 years, and therefore, they don't have that risk to bear. Also, the debt that you were burdened with prior to filing will be discharged, which will make you more attractive to a prospective creditor. You may not get as high a credit limit as you once had, or be able to borrow large sums of money, but getting some credit (such as a secured or even an unsecured credit card) shouldn't be that difficult, and you can rebuild your credit over time. What you will likely face is higher interest rates and higher down payments. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc. Many of my clients who have received a Chapter 7 discharge report to me that they have been successful in rebuilding credit, and have purchased homes, vehicles and other assets on credit.

As mentioned above, you are not able to file a Chapter 7 if you have filed a previous Chapter 7 within eight years, and received a discharge in that previous case. Therefore, you should not file a bankruptcy if you need the option of doing it again in the next eight years. (This eight year rule does not apply if the second filing is a Chapter 13).

What is the cost of filing Chapter 7? Please see the discussion on fees and costs elsewhere in this site for a more complete discussion of this question. Generally, however, the fee for a Chapter 7 case with primarily consumer debts and with no anticipated litigation can be expected to be approximately $1,200 to $2,000. (This could be slightly less in very simple matters or more in more complicated cases). In addition to the fee, the court charges a filing fee of $299 for Chapter 7 cases. This does not go to the attorney, but instead is paid to the court.

What are you getting for your money? My fees are extremely competitive. Can you find lower fees elsewhere? Possibly. But, you must ask yourself what are you getting (losing) by saving money and how much money are you really saving? The truth is that all attorneys are not equally competent. There are good attorneys and hopelessly bad attorneys. I am not suggesting that just because an attorney charges lower fees that he or she is incompetent. However, the decision on which lawyer to retain should not be based solely on the fees charged. There are many attorneys to choose from, just as there are a lot of doctors. Would you go to a doctor simply because he or she charges a "bargain basement" price for something serious? Wouldn't that make you skeptical? So, why would you do that with an attorney who is essentially helping you shape your financial future? I don't know the answer to that, but I do get calls from people who are trying to discharge (eliminate) $30,000 or more debt and want to save $100 on the attorneys' fees.

Also, from time to time I receive calls from people who have filed a bankruptcy with an incompetent attorney or paralegal (often these attorneys have charged far more than I would have charged) and then want to hire me to fix the problems, if possible (and often it is not possible at that point). When selecting an attorney, you need to ask several important questions:

  1. Am I comfortable with this attorney? Does the attorney sincerely care for me and my legal problem, or am I just another case?
  2. Does this attorney have the experience and expertise to handle the problems that may arise in my case? Ask the attorney how many Chapter 7 bankruptcy cases he or she has handled.
  3. Is the attorney personally handling the main portions of my case, or instead, delegating the work to secretaries or paralegals? Of course, there is nothing wrong with an attorney using support staff to assist in the preparation of your case. However, you should guard against the situation where most of the preparation with you is done by a paralegal.
  4. What am I getting for my fees? This question deserves some attention. I see all kinds of advertisements by attorneys offering bankruptcies at extremely low fees with the disclaimer that says "fees starting at...". I would be most curious to find out if the attorneys actually take any cases at that amount. I sincerely doubt it. If you check with these attorneys, you should ask if there are any "additional" charges for photocopying, file charges, etc.
  5. Does the attorney provide a retainer agreement or services contract outlining specifically what is covered for your fees and outlines the responsibilities of both you and the attorney? The retainer agreement is not required, but should be given by any attorney. You should demand it so that there is no question about what you are paying for.

How do I pay the fees and costs? One common problem people who are facing Chapter 7 bankruptcy often have, of course, is a lack of cash. However, there are ways to free up cash once you understand how the system works. For example, if your cash flow is low because you are making minimum payments on your credit cards, you may be able to stop making those payments and thereby save up some money for the legal costs of filing (don't do this without advice of your attorney). It is also possible to make payments over time until the full amount has been paid, at which time the bankruptcy petition can be filed. (Please understand that the court does not allow an arrangement whereby any of the fees for a Chapter 7 can be paid after filing). Or, perhaps a relative can help you with the cost. In any event, there is usually a way to make it work. I do understand that some people really cannot afford anything but the absolute minimum (whatever that might be) and for them, I suggest they do everything they can to ensure that the attorney they select is competent and pays attention to their case from start to finish. However, if you really are in this situation, bankruptcy may not be the best solution to your problems.

I pride myself on providing a very high quality of service for my clients. I have also set up my practice to minimize expenses and pass those along to my clients in the form of the lowest possible attorney's fees. I will work with you to arrive at a payment plan that fits with your personal situation.

Do I Need An Attorney At All? You may be tempted to attempt to prepare and file the bankruptcy documents yourself. After all, you can buy the forms and fill the blanks in yourself. That way, you avoid the attorney's fee (you still have to pay the court costs). Or, there are some "bankruptcy preparers" who charge a minimal fee to prepare and file the necessary paperwork to file a bankruptcy. While in some cases this may not be a major problem, it has been my personal experience that the risk is simply not worth it. Much of what goes into the bankruptcy petition, schedules and statements comes from insightful and probing questioning from a qualified bankruptcy attorney. Bankruptcy preparers are strictly prohibited from practicing law and, therefore, cannot give legal advice or even ask the necessary questions to make sure you are completing your paperwork fully and completely. Even if they were legally allowed to do so, they are not able to adequately assess the laws surrounding exemptions and to determine what your best options are. In preparing the documents yourself, with or without the assistance of a bankruptcy preparer, you may assume, for example, that there is no problem with not listing a particular asset or debt, or reaffirming a particular debt, only to find out months or even years later that you did not get rid of that debt, or that you may lose an asset, or any number of other problems. Perhaps most importantly, without an attorney, you will not have representation in court if the need should arise (and it often does when paralegals handle things). Further, if you list things incorrectly in your petition, schedules or statements, or omit necessary items, it is YOUR problem, not the paralegals problem.

You sign all your bankruptcy papers under penalty of perjury. Ultimately, the debtor may have to spend several thousand dollars to attempt to remedy a situation that could have been prevented, or at least planned for, at the beginning. Bankruptcy is a very important decision. It is basically the first step towards your entire financial future. The entire bankruptcy system is designed so that attorneys represent all parties involved. That is what we are trained to do. Do you want to trust this future to yourself or to a non-licensed nonprofessional? This is the time that you should do things correctly. Don't skimp and save at this point. Hire the most competent attorney that you can afford and take the first step towards your fresh start.

Call Today for a consultation. Before you do so, however, please visit the page What Information Do I Need? If you can have the information discussed there available at the time of our consultation, I can better advise you.

Nothing contained herein should be construed to constitute advice for your personal situation.