What Is a Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in Chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors.
The Bankruptcy Code will allow the debtor to keep certain "exempt" property, but a trustee will liquidate the debtor's remaining assets. Accordingly, potential debtors should realize that the filing of a petition under Chapter 7 may result in the loss of property.
Who is Eligible for a Chapter 7 Discharge?
Any person who is qualified to file and maintain a chapter 7 case is eligible for a chapter 7 discharge except the following:
- A person who has been granted a discharge in a chapter 7 case that was filed within the last 8 years.
- A person who has been granted a discharge in a chapter 13 case that was filed within the last 6 years, unless 70 percent or more of the debtor’s unsecured claims were paid off in the chapter 13 case.
- A person who files and obtains court approval of a written waiver of discharge in the chapter 7 case.
- A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the trustee in the chapter 7 case.
- A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.
- A person who makes false statements or claims in the chapter 7 case, or who withholds recorded information from the trustee.
- A person who fails to satisfactorily explain any loss or deficiency of his or her assets.
- A person who refuses to answer questions or obey orders of the bankruptcy court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he or she is associated.
- A person who, after filing the case, fails to complete an instructional course on personal financial management.
- A person who has been convicted of bankruptcy fraud or who owes a debt arising from a securities law violation.
When is the Best Time to File a Chapter 7 Case?
The best time to file depends on the status of the person’s dischargeable debts, the nature and status of the person’s nonexempt assets, and the actions taken or threatened to be taken by creditors. The following rules should be followed:
- Don’t file the case until all anticipated debts have been incurred. Only debts that have been incurred when the case is filed are dischargeable and it will be another eight years before the person is again eligible for a Chapter 7 discharge. For example, a person who has incurred substantial medical expenses should not file a Chapter 7 case until the illness or injury has been either cured or covered by insurance. It will do little good to discharge, say, $100,000 of medical debts now and then incur another $100,000 in medical debts after the case has been filed.
- Don’t file the case until the person filing has received all nonexempt assets to which he or she may be entitled. If the person is entitled to receive an income tax refund or a similar nonexempt asset in the near future, the case should not be filed until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will have to be turned over to the trustee.
- Don’t file the case if the person filing expects to acquire nonexempt property soon. Acquiring property through inheritance, life insurance, or divorce in the next 180 days may require it to be turned over to the trustee.
- File immediately to stop wage garnishment or foreclosure. If an aggressive creditor has threatened to attach or garnish a person’s assets or income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a Chapter 7 case. If a creditor has threatened to attach or garnish the person’s wages or if a foreclosure action has been filed against his or her home, it may be necessary to file the case immediately in order to protect the person’s interest in the property.
Start Getting Yourself Out of Debt Today
If you're drowning in debt, don't lose hope. Steffens Law Office can help you determine if a Chapter 7 discharge is the best option for you. Contact our experienced bankruptcy attorney today to schedule a free, no-obligation consultation.