What Is a “Chapter 7” Bankruptcy?
The United States Bankruptcy Code is divided into chapters, and the three most common forms of bankruptcy are referred to as Chapter 7, Chapter 11, and Chapter 13. Of these, Chapter 7 bankruptcies are the most common bankruptcy proceeding in the United States. If you are considering filing for bankruptcy or are uncertain what type of bankruptcy is best for you, you should consult with a Michigan Chapter 7 bankruptcy attorney.
Chapter 7 bankruptcy proceedings are available to both individuals and businesses. In contrast to Chapter 11 and Chapter 13, which allow for the restructuring or reorganization of debt, the purpose of a Chapter 7 proceeding is to liquidate assets in order to satisfy all or some portion of the total debt obligations owed by the debtor to his or her creditors, and to accomplish a final discharge of these obligations.
Chapter 7 Proceedings for Individuals
In the case of an individual who undergoes a Chapter 7 bankruptcy, the individual must submit to the court a complete listing of all debt obligations a debtor holds to all of his or her creditors, as well as a listing of assets available to satisfy these debts. A court-appointed Trustee then carries out a liquidation of the available assets, and distributes the available assets impartially and fairly to the creditors. Once the procedure is concluded, certain types of debt are fully discharged, providing no additional recourse for the creditor to collect on these debts. The individual may then begin to build anew his or her financial position with a “clean slate.”
Who Can File For Chapter 7?
Chapter 7 is not available to everyone. Under federal law, an individual may only utilize Chapter 7 if they meet a “means test.” The means test is used to determine if the individual truly has no means available to meet his or her debt obligations, and is based upon income and debt obligations. If an individual does not meet the means test, they may be compelled to file for a Chapter 13 bankruptcy, instead. Unlike Chapter 7, Chapter 13 does not generally enable the debtor to obtain a complete discharge of certain debts, but rather to restructure debt so that it may be paid off within a specific time frame, although there may be some limited relief from certain obligations.
Can Chapter 7 Relieve You of All Your Debt Obligations?
As a general rule, Chapter 7 bankruptcies cannot discharge debts that are subject to liens, such as mortgages and car loans. These debts are secured by the assets upon which the money was loaned, and the creditors retain rights in those properties that the bankruptcy court cannot discharge. At the same time, these creditors are not entitled to any distribution of funds from the liquidation if the value of the secured property exceeds the debt owed.
There are also other types of personal debts which the bankruptcy court cannot discharge by law, such as income taxes, property taxes, child support payments, spousal support, and so on, that the debtor owes.
Chapter 7 for Businesses
The process of a business filing under Chapter 7 is similar to an individual filing: the business must list all creditors and all debts, and a Trustee is appointed by the Court to liquidate the total assets of a corporation and to distribute the proceeds to creditors impartially and fairly.
However, while the purpose of an individual filing it to allow the individual to obtain a “fresh start,” that is not so in the case of a business. A business that files Chapter 7 ceases operation once the case is filed, and then is completely dissolved. Technically, a corporation or partnership whose assets are liquidated and distributed to creditors continues to exist and to hold its debt obligations; however, since the business may not continue to operate, the obligation simply expires with time. (That is, the statute of limitations will run out on the uncollected debt.)
Just as with an individual, certain types of business creditors hold rights that cannot be defeated by a bankruptcy proceeding. If a creditor holds a secured debt, such as a real estate mortgage, an auto loan, or a collateralized bond, that creditor has a prior claim on the asset that secures the debt, and the bankruptcy court cannot defeat those rights. Again, these creditors are not entitled to any distribution of liquidated assets if the value of the collateral exceeds the amount owed to them.
Will the Bankruptcy Trustee Liquidate All of Your Assets?
For individuals, it is important to understand that not all property is subject to liquidation under Chapter 7. The types of property or property interests that are exempt from liquidation depend upon both state and federal law, and the list of exemptions can be quite extensive. Generally, these exemptions will always consist of items such as family pictures; clothing; tools or equipment needed by the debtor to carry on a trade or business; basic household goods; certain rights to income (such as child support payments, disability payments); and so on.
The bankruptcy court also recognizes that there are certain items that are essential in order for individuals to be able to regain their financial footing, such as housing, a vehicle, and a computer, for example. How the bankruptcy court will treat your assets depends upon your particular situation. Before you file, you should obtain advice from an attorney on exactly which of your assets will be protected from liquidation.
What Other Factors Should You Be Aware of?
One of the most important aspects of proceeding under Chapter 7 is the “Automatic Stay.” An Automatic Stay immediately goes into effect once a bankruptcy petition is filed in the appropriate bankruptcy court. The stay prohibits creditors from harassing the debtor, or from trying to obtain repayment through wage garnishment, repossession, litigation, or foreclosure proceedings. It gives debtors a much-needed “time out” during which creditors must leave the debtor alone, because they are on notice that their loans are subject to discharge through bankruptcy.
In addition, individuals who undergo a Chapter 7 proceeding should be aware that they are obligated by the court to complete a financial management course within a specific time frame. Failure to take the course will result in the case being closed without a discharge of debt.
How Will a Chapter 7 Bankruptcy Affect Your Credit?
A Chapter 7 bankruptcy will be recorded on a credit report and remain for 10 years from the date the Chapter 7 petition is filed. Obviously, this may make credit less available or force an individual to obtain credit on unfavorable terms. However, it is not always the case that a bankruptcy will have serious detrimental long-term effects on credit.
For example, when an individual files a bankruptcy proceeding under Chapter 7, it is often the case that the individual has already suffered adverse reporting on his or her credit report. Accordingly, the bankruptcy may not have an incrementally significant effect on one’s ability to obtain credit beyond the existing negative entries.
Furthermore, a bankruptcy on a credit report does not necessarily result in credit becoming unavailable. Because creditors are aware that the law does not allow an individual to abuse the bankruptcy process by repeatedly discharging debt via bankruptcy proceedings, some creditors may be willing to extend credit to those who have recently undergone a bankruptcy, knowing that the new debt obligation will not be discharged in a subsequent bankruptcy.
Finally, while a negative entry on a credit report may be of concern when filing under Chapter 7, it must be weighed against the positive impact of having your debts fully discharged. If you are unable to meet your debt obligations, continuing to default can be more damaging than a bankruptcy, and your best option may be to “start fresh” and to begin rebuilding your credit right away.
How Can You Tell if Chapter 7 is the Right Option?
Every individual and business is different, and the laws surrounding bankruptcy can be complicated and confusing. If you need help deciding whether a Chapter 7 bankruptcy is the right choice for you, call the Macomb County Chapter 7 bankruptcy attorneys at Biernat Law Group for a free, no-obligation personal consultation today at (586) 493-5377.