New Year Resolution #15: Get a Fast Financial Fresh Start, Leaving You with No Debts or Only the Debts You Can Handle
Feb. 2, 2015
Chapter 7 “straight bankruptcy” is quick, usually quite straightforward, and appropriate for more situations than you might think.
In our last blog we described how Chapter 13 “adjustment of debts” works, some of its amazing tools, as well as some of its limitations. We’ll do the same here today with the Chapter 7 option.
Chapter 7 Contrasted to Chapter 13
Chapter 7 is very different from Chapter 13.
Whereas a Chapter 13 case takes usually 3 to 5 years to finish, if you filed a Chapter 7 case tomorrow it would likely be finished only 3 months or so from now.
Whereas Chapter 13 involves a court hearing in which a payment plan must be approved by a bankruptcy judge, most Chapter 7 cases do not have a court hearing and seldom involve a judge other than behind the scenes.
Whereas a significant percentage of Chapter 13 cases do not run their full course successfully, almost all Chapter 7 cases finish with a discharge (legal write-off) of debts (at least those represented by an attorney).
Whereas Chapter 13 cases usually have a number of unexpected twists and turns—if for no more reason than how long they take to complete—Chapter 7 cases usually proceed very much as expected, with no surprises.
What is Chapter 7 Bankruptcy?
Chapter 7 is by far the most common type of bankruptcy. It is what most people think of when they hear “consumer bankruptcy.” For many people it is the quickest way to a financial fresh start.
A Chapter 7 case writes off (“discharges”) all or most of your unsecured debts—those which have no collateral. Certain kinds of debts, such as child or spousal support obligations owed to an ex-spouse under a divorce decree or settlement, are never discharged under Chapter 7. Other kinds of debts, such as income taxes, can be discharged if they meet certain conditions. Student loans are very rarely dischargeable.
With secured debts like car loans and home mortgages, you usually can choose to keep the collateral or surrender it. If you keep it, you generally have to legally “reaffirm” the debt (so that it is not discharged), and make all the payments until the debt is paid off and the collateral is yours free and clear. If you surrender the collateral, any remaining debt is discharged.
Chapter 7 usually lasts about three months from the day you file the bankruptcy to the day you get your discharge, when most cases are completed and closed. At the beginning of your case a bankruptcy trustee is appointed to review your financial affairs and assets. You are entitled to keep (or “exempt”) certain types of your property, usually up to specific maximum dollar values. In a very large majority of cases all of the debtors’ assets are “exempt” so they get to keep everything they own. The trustee has the power to take possession of and sell (“liquidate”) assets that are not covered by the “exemptions.” If the trustee determines that all the assets are exempt, or else just not worth trying to liquidate, he or she reports the case to be a “no asset” case.
Usually, all or most debts are discharged, and your creditors are forever prohibited from trying to collect those debts from you. So in a matter of three months or so you usually end up free of all your debts, except those you chose to keep (such as your home mortgage and car loan) or could not discharge (such as recent income taxes and back child support).
Potential Challenging Aspects of a Chapter 7 Case
Chapter 7 is certainly not always the best option. Here are some of the situations in which a Chapter 7 case would give you problems, perhaps making Chapter 13 the better way to go:
The “means test”: You have to qualify to file a Chapter 7 case, based first on your income, and then if your income is too high you may still possibly qualify based on your allowed expenses, and sometimes other factors. Otherwise, you may have to file a Chapter 13 case.
“Non-exempt” assets: If you own something that is not exempt and you want to keep, Chapter 13 is often a safer way to accomplish that.
Debts that can’t be discharged: If you owe a lot of relatively recent income taxes, or back child support payments, dealing on your own with the creditors on these debts after your Chapter 7 is over can be very difficult. Instead under Chapter 13 you maintain protection from them while paying them on a schedule based largely on your ability to do so.
Home mortgage arrearage: If you are behind on a home mortgage, you are at the mercy of your mortgage lender as to how long you’ll have to catch up. Chapter 13 gives you as long as 5 years to catch up.
Vehicle loan limitations: If you want to keep your vehicle but are behind on the loan payments and/or can’t afford the monthly payment, in a Chapter 7 case you almost always have to catch up very quickly and you can’t reduce the monthly payment amount. But if you qualified for a Chapter 13 “cramdown,” you wouldn’t have to catch up at all and the payments would be reduced.
Sensible Chapter 7 Compromises
Although most Chapter 7 cases are quite straightforward, here are some situations that could still work well under Chapter 7 in spite of a complication:
Non-exempt assets to be surrendered: If you have something that is not protected by an exemption, you may not mind giving it up, especially if doing so is preferable to being in a Chapter 13 case for 3 or more years.
Non-exempt assets to be paid for: If you own something that is not protected by an exemption, you may be willing and able to pay the trustee—through monthly payments, if the trustee is willing—for the right to keep the asset.
A reasonable amount of income taxes not discharged: If you owe some taxes that do not meet the conditions for discharge, but after the Chapter 7 case is done you would be able to afford a monthly payment plan to pay them off over a reasonable period of time, that may be preferable to being in a Chapter 13 case for years longer.
A simple Chapter 7 case will very likely get you a fresh financial start in a very short time. Even if your situation isn’t all that clean and simple, Chapter 7 can still often be your best solution, such as in the examples immediately above. Get advice from a bankruptcy attorney to find out which option is best in your unique situation.