Chapter 7 Bankruptcy

When most people think of "bankruptcy", they are thinking of a bankruptcy proceeding filed under Chapter 7 of the United States Bankruptcy Code. Sometimes non-lawyers call this a "straight", "complete", or "fresh start" bankruptcy. The purpose of a Chapter 7 bankruptcy is to eliminate most debts. This page addresses the questions my clients most frequently ask me regarding Chapter 7.

Can I File Under Chapter 7?

Many people believe that the changes made in 2005 to the Bankruptcy Code eliminated Chapter 7 bankruptcy or made it extremely difficult for most people to proceed under Chapter 7. This is simply not true.

The majority of people who qualified under the old bankruptcy laws still qualify for a Chapter 7 case under the new bankruptcy laws. The new or changed bankruptcy provisions restricting access to Chapter 7 mainly affect people and families in higher income brackets. I will be able to tell you at your free initial consultation whether your income disqualifies you from Chapter 7; the vast majority of people who come to me seeking to file Chapter 7 are able to do so. But the analysis of whether your particular circumstances allow for a Chapter 7 filing is very complicated and that is one of the many reasons that I strongly encourage you to get a bankruptcy attorney if you are contemplating a filing, whether or not that attorney is me.

Are All Debts Eliminated in Chapter 7?

The chief advantage of a Chapter 7 bankruptcy is that when the process has completed you will have eliminated, without any additional payments, most of your debts. Here is a brief discussion of the categories of indebtedness and whether the debt will require additional payments from you:

• Unsecured debts. Unsecured debts typically may be eliminated (in bankruptcy we refer to this elimination as "debt discharge"). Examples of dischargeable debts include credit card obligations, medical bills, deficiency claims when there remains a loan balance after repossession of a car by the car lender, obligations assigned to collection agencies, past due utility bills, payday loans, judgments obtained in lawsuits and personal loans. Relief from these types of debt will greatly reduce the stress in your life, not the least of which is the stress from collection calls and other creditor action.
• Secured debts. This kind of debt uses some kind of property such as a house or car as collateral that, outside of bankruptcy, the creditor can "take back" if timely payments are not made on the underlying loan. Typical examples include mortgages, car loans, and loans made so you could purchase jewelry or furniture. The general rule in Chapter 7 is if you keep the property you have to keep the debt. If you surrender the property to the lender in a Chapter 7, you can eliminate the debt. And there is yet a third option of "redemption" for some types of secured loans. I believe you cannot sensibly make the decision whether to reaffirm the debt, redeem the secured property, or surrender the collateral without the advice of a good bankruptcy attorney, as there are many legal and practical factors that go into the decision.
• Income taxes. Unless the income tax obligation is fairly old, it will not be eliminated by the Chapter 7 filing. The rules for determining whether the tax claim is old enough to be eliminated by the Chapter 7 case are very detailed and complex. If there is a tax claim against you and you decide for some reason that you do not wish to use me as your attorney, please make sure that you obtain the assistance of another experienced bankruptcy lawyer to determine whether a Chapter 7 case will eliminate the tax claim against you, as there is too much room for error when a non-lawyer tries to answer that question.
• 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 is very hard. You must show: 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. The procedure for bringing this matter in front of the Bankruptcy Court is very time-consuming for me. Accordingly, my standard fee agreement provides that I will receive additional fees if you wish to try to get an order from the Bankruptcy Court determining that your student loan debts should be eliminated as a result of your Chapter 7 case.
• Alimony and child support. This kind of debt is not eliminated by the completion of a Chapter 7 case. Also, under the 2005 changes in the bankruptcy law, if a debt has been incurred in the course of a divorce, even if it is not alimony or child support, it is not eliminated in Chapter 7. For example, if you have agreed to pay a certain debt in a property settlement agreement, payment of that debt will remain your legal obligation to your ex-spouse despite your completion of a Chapter 7 bankruptcy.
• Other exceptions to debt elimination. There are other categories of debts that are "excepted" from eligibility for debt discharge/elimination. When we discuss your financial circumstances at your initial consultation, I will point out any other exceptions that may be applicable in your case.

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 in your filing with the Bankruptcy 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. In my experience, the most common way that individuals unexpectedly lose property in a Chapter 7 is that they fail to tell their attorney about all of their assets. If I don't know about the property, I can't tell you whether you will be able to keep it as part of your Chapter 7 nor can I tell you whether Chapter 7 is the proper way for you to proceed. Don't make the mistake of not disclosing all of your property. First of all, it is a federal crime not to disclose everything you own. Secondly, in this day and age of electronic information, the Chapter 7 Trustee who will be assigned to review your case will almost certainly be able to discover what you own whether or not you disclose it.

The Chapter 7 Trustee can sell any of your property that is not "exempted" under state or federal laws. In most Chapter 7 bankruptcy cases, however, people do not lose any property. This is especially true in Ohio now that the state legislature has changed the Ohio exemptions: in 2008 the values for the property that you can exempt were significantly raised. I will be able to tell you during our initial consultation whether you have any property that would be subject to the Chapter 7 Trustee's right to sell it and distribute the sales proceeds to your creditors. You can then decide whether you wish to proceed with a Chapter 7 filing.

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