What is Chapter 7?
Chapter 7 is bankruptcy relief designed for individuals and businesses that find themselves unable to pay their debts. For whatever reason – loss of job, medical problems, disability, retirement – there simply isn’t enough money to make ends meet. The only solution is to be rid of these impossible burdens and get off to a fresh financial start.
You can complete a Chapter 7 and still owe certain debts. These debts are listed in the law and are referred to as non-dischargeable debts. So if you have a non-dischargeable debt, you must pay it even though you have completed a Chapter 7. These non-dischargeable debts are discussed below.
The second exception to the basic concept covers assets. When you file a Chapter 7, ALL of your assets automatically, as a matter of law, belong to the bankruptcy court to be liquidated for the benefit of your creditors. The important exception to this is that usually you get to keep all of your assets. The idea is that you need certain assets in order to make a successful fresh start. If you have assets that are not exempt, then you lose these assets. The good news is that almost any asset the average person or family has is exempt, which means that you normally keep all of your assets and lose nothing. The idea that you lose all of your assets simply is not true. A discussion of those assets you can keep is found below. As to exempt assets, if the asset is paid for, you keep it without reservation. If the exempt asset is not paid for you have to make a choice. You can return the item to the creditor and owe nothing, or you can keep the item, but if you keep it, you must pay for it.
So, generally speaking, a typical Chapter 7 result would be that you don’t have to repay any debts except those items not yet paid for, such as your house or car, and you keep all of your assets.
What happens to my debt?
Upon completion of a Chapter 7, all debts that the law does not say are non-dischargeable debts are discharged. That means that you are under no legal obligation to pay any debt that is discharged. Furthermore, after your Chapter 7 discharge all creditors are under court order not to try to collect a debt that has been discharged and has not been reaffirmed by the court.
Will I lose any assets?
One of the most common misunderstandings in Chapter 7 is that you will lose all of your assets. This simply is not the case.
There are certain defined assets called exempt assets. Out of all of your assets you are allowed to keep your exempt assets, the idea being that you need certain basic items in order to make a successful fresh start after bankruptcy.
These exempt assets are defined by law. In Texas there are two lists of exempt assets, one is defined by the State of Texas, and the other defined by the U. S. Congress. You look at both lists to choose which one would allow you to keep the most. You can choose from either list, but not both.
As the lists vary, it is important to inventory all of your assets and then determine what would be exempt under both lists. This allows you to select the list that enables you to keep as much as possible. Quite often, especially in a family situation, all of your assets will be exempt, which means you lose nothing after filing bankruptcy.
What about the IRS?
As the old saying goes, the two things you can’t avoid are death and taxes. This is generally true in Chapter 7, that is, taxes are non-dischargeable. However, if an income tax debt meets the following requirements it may be discharged just like any other debt:
1. The last day on which the tax return could legally be timely filed, including extensions, must be over three years prior to filing the Chapter 7. However, even if the tax is over three years old but has not been assessed but is assessable, it cannot be discharged.
2. The tax must have been assessed over 240 days prior to filing Chapter 7.
3. The tax return must have been filed on time.
4. The debtor must not have done anything to delay or defeat payment of the tax and the tax return must not be fraudulent.
5. The tax must be unsecured, which means the IRS has not properly perfected its tax lien.
The above exceptions do not apply to the so called trust fund taxes such as employee withholding, social security withholdings and most sales taxes. These can almost never be discharged. The employer’s contribution of social security can be discharged if it meets the above exceptions. Likewise, interest and penalties can be discharged if the underlying tax can be discharged.
If the IRS perfects a tax lien securing the payment of a tax, the tax must be paid to the extent of the value of all of your assets, even though the taxes are dischargeable. If you have tax liability that might be dischargeable and there is no lien, you should contact a tax consultant as soon as possible to explore your options on how to deal with this situation.
Property taxes that have been assessed and were payable without penalty over one year before Chapter 7 is filed can be discharged.
There are some interesting possibilities for discharging taxes in Chapter 13 that are not available in Chapter 7.
This is a complex and technical area of the law. You should consult a competent bankruptcy attorney to determine your options.
What about lawsuits and judgments?
The filing of a bankruptcy prevents any lawsuits from being filed or judgments taken against you pertaining to existing claims. If you file bankruptcy and a lawsuit against you is pending, it can go no further. If a judgment has already been taken, its enforcement can go no further, all without first getting permission from the bankruptcy court.
If a judgment has already been taken against you, when filing for Chapter 7 the debt can usually be discharged, that is, you don’t have to pay the judgment debt.
If the judgment has placed a lien on your assets, you may be able to avoid this lien – – that is, as to exempt assets such as your home, furniture, appliances, etc., it would be as though the judgment lien did not apply to these assets.
Can I keep all my property?
Before filing a Chapter 7 it is important to determine whether or not you may lose any of your assets.
In Chapter 7 you are allowed to keep all of your exempt property, those assets such as your home, vehicle, household furnishings, personal items, life insurance, retirement benefits and others. If you have an asset that is not exempt, you lose it to be liquidated for the benefit of your creditors. However, if the asset is such that it cannot be sold so that an amount may be given the creditors, such an asset can be abandoned as a “burdensome asset”, in which case you may keep the asset as though it were exempt.
If you have given a creditor a non-purchase money non-possessory lien on certain consumer items, such lien may be avoided and you can keep the asset and you do not have to pay for it. A common example is when you borrow money from a loan or finance company and they ask you to list a tv or whatever as collateral. Since the loan proceeds did not go to purchase the tv and you retain its possession, the lien is avoided, you keep the tv and don’t have to pay the debt.
What about my car and my assets I want to keep?
When considering filing a Chapter 7, one serious concern is what can I do to keep my car and other necessary assets
If the exempt assets are fully paid for, in other words, there is no lien or security interest against them, then you keep and enjoy them without reservation.
If the item, such as a car or furniture, is not fully paid for and has a lien or security interest, you have to make a choice. First – you can choose to surrender the item and owe nothing more on the debt, even if the item surrendered is worth considerably less than the amount of the debt.
The second choice would be to keep the item, but if you keep it you must pay for it. You may pay for the item in one of two ways. First – you can pay the value of the item in full in cash and the item is yours and you owe nothing else on the debt. This is called your “right of redemption.” This choice is not usually possible because it normally requires a large sum of cash.
Therefore, the other choice is to keep the item and pay the amount due, but to make the payments in installments. This is called “reaffirming the debt.” The key to reaffirmation is to realize that both you and the creditor must agree on the terms of reaffirmation. Usually the creditor would rather get paid than to take back the item.
If you can’t either redeem or reaffirm the debt, which is not usually the case, you can always surrender the item, owe nothing further and simply repurchase the items elsewhere.
What about school loans?
Student loans, whether from a public lender guaranteed by aa governmental agency or a private lender are almost always non-dischargeable. After filing bankruptcy you will still owe them, but there are several options and remedies that you should discuss with your attorney.
What debts are non-dischargeable?
When you file Chapter 7 all of your debts are discharged – that is you don’t have to repay them – unless the law specifically says the debt cannot be discharged – that is you have to pay them even though you have completed a Chapter 7. These debts that must be paid are called “non-dischargeable debts.”
Obviously the dischargeability of the debt is a real battleground in bankruptcy because the creditors want all debts to be non-dischargeable and debtors want all debts to be discharged. Each situation should be evaluated by an attorney, but the following will give you an idea of debts that may not be discharged in a Chapter 7:
• Certain taxes
• Child support or alimony
• Student loans or educational benefit overpayments
• Debts incurred under fraudulent, deceptive, malicious or criminal behavior of a debtor
• Certain credit card abuse
• Debts not listed in your Chapter 7
• Criminal fines, penalties or forfeitures
• Death or personal injury caused by DWI or DUI
Again, the above are merely examples of the types of debt that may not be discharged in Chapter 7. There are many exceptions, and the law generally favors the discharge of debts in order to allow the debtor a fresh start. It is only the head start or the unconscionable start that is frowned upon.
Can I continue to pay a debt after bankruptcy?
After filing Chapter 7 bankruptcy, you are free to pay any debt you wish.