Giving Thanks for Chapter 7 “Straight Bankruptcy”
Nov. 25, 2015
Chapter 7 has many important features deserving appreciation.
Filing a Chapter 7 bankruptcy case gives you many astounding benefits. We’ll start with 5 today, the day before Thanksgiving, and give you another 5 the day after Thanksgiving:
1) The “Automatic Stay”
The moment your case is filed you and everything is own gets covered by a blanket of protection against virtually all the collection activities of your creditors. All the laws that provide procedures for creditors to get you to pay their debts are automatically thrown out the window. The automatic stay is this one law that defeats just about all the collection laws.
The automatic stay stops ongoing wage and bank account garnishments, lawsuits, vehicle repossessions, home foreclosures, and more. Also, during the time your Chapter 7 case is active it prevents new garnishments from being delivered to your employer and your financial institution, a new lawsuit from being filed and served on you, a tax lien from being recorded against your home and other assets, and such.
This immediate and incredibly broad protection relieves collection pressures against you so you can catch your breath financially.
2) Property “Exemptions”
Most people filing a Chapter 7 “liquidation” case don’t actually have anything they own liquidated, or sold out from under them. It’s called “liquidation” because what you own could be taken from you to pay creditors, but only to the extent that what you owned was not covered by exemptions. Exemptions are categories and amounts of assets that you are allowed to keep, protected from creditors. Because most people who file under Chapter 7 only own assets that are exempt, so they get to keep it all.
Not having to liquidate anything in a “liquidation” case and still get all the benefits of Chapter 7 is having your cake and eating it, too.
3) “Reaffirmation” of Vehicle Loans and Other Secured Debts:
Bankruptcy in general and Chapter 7 in particular have limits on how much you can treat creditors you like differently than your other creditors. But the law respects certain distinctions between creditors that you can take advantage of.
The difference between secured and unsecured creditors is one such legally respected distinction. If you have collateral securing a debt—such as a vehicle securing a vehicle loan—and want to keep the collateral—the vehicle, in this example—Chapter 7 usually lets you to favor that creditor. You are allowed to discharge (legally write off) all your other debts while affirmatively choosing to NOT discharge a vehicle loan. That’s called a “reaffirmation” of the vehicle loan. You agree to remain legally liable in return for the creditor allowing you to keep the vehicle. You pay it off over time, usually under the original contract terms, re-building your credit as you do so, until you pay it off and own the vehicle free and clear of the lien.
You are not required to “reaffirm” a vehicle loan or any other secured debt—if you surrender the collateral and not reaffirm the debt it will be discharged along with the rest of your debts.
4) Paying Favored “Creditors” If You Want
If you want you can pay a very special debt that you feel strongly about paying because of a moral or family obligation.
But these kinds of debts are handled differently. You don’t formally “reaffirm” such debts. Instead, if they are legally enforceable obligations you list them on your Chapter 7 papers just like all your other debts. Then they are discharged, erasing your legal obligation to pay, usually only about 3 to 4 months after filing the case.
At that point, after all or most of your other debts are gone, you can resume payments if you want, to satisfy your moral or family obligation. Or you can start to pay later if you need to wait until you can better afford to do so. Your creditor will usually be that much more appreciative that you are paying out of a sense of personal obligation even though you’re no longer legally required to.
5) Qualifying for the “Means Test” by Income:
You have to qualify to be in a consumer Chapter 7 case by passing the “means test.” If you don’t pass this test you can’t complete the Chapter 7 case but likely would be required to be in a Chapter 13 “adjustment of debts” case instead. The Chapter 13 procedure has advantages for people in certain situations, but generally requires 3 to 5 years to complete (instead of 3 or 4 months). Throughout that time you must make monthly payments into your “Chapter 13 plan” to be distributed to some or all of your creditors. The point is that if you have the “means” you are supposed to pay what can afford to pay to your creditors through such a payment plan.
The good news is that most people who want to file a Chapter 7 case have no trouble passing the “means test” because their income is low enough—less than the “median income” for their family size and state of residence. And even if their income is somewhat higher than their applicable “median income,” there are still usually ways to pass the “means test” through a calculation of allowed expenses or through special circumstances. The “means test” is not usually a roadblock to Chapter 7.