Chapter 7 Bankruptcy
Chapter 7 bankruptcy (Title 11 of the United States Bankruptcy Code) is commonly known to attorneys, lawyers, and others as a liquidating bankruptcy, personal bankruptcy, or just plain "bankruptcy."
It's also referred to as consumer or personal bankruptcy, although businesses can also file under Chapter 7. For cases filed after October 17, 2005, eligibility to file Chapter 7 is to be determined by a means test if your annual income exceeds the median income for your geographic area as determined by the IRS. under any Chapter, you are required to list all of your assets and all of your debts on your petition.
An asset is anything you own or may have a right to own at some future date (for example, if you are in someone's will). Some (and in many cases, all) of your assets will be exempt. Wisconsin law provides two separate sets of exemptions from which to choose. A detailed analysis of these exemptions is not possible here. Basically, you can exempt any items normally used for your support and maintenance, such as clothing, furniture, household goods, and so forth. After you file your case, a Trustee is appointed. He (or she) will liquidate (sell) all of your non-exempt assets and pay your creditors according to the priority afforded to them by the Bankruptcy Code. You may voluntarily repay any debt upon agreement with the creditor. Whether this is ever advisable is questionable and is an issue to be discussed with your attorney.
Should you file Chapter 7?
The goal of most any personal bankruptcy is to discharge or bankrupt your existing debts and allow you a fresh start on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. Your creditors are entitled to share in the proceeds obtained from the liquidation of your non-exempt assets. Under Chapter 7, the amount your creditors will get is fixed by the value of your non-exempt assets.
Technically, the word "bankrupt" is not the correct terminology when referring to getting rid of debts, but most people use that phrase. "I want to bankrupt my credit cards or bankrupt my student loan debts". The correct legal term is "discharge". You discharge your obligation to pay on debts. Throughout this web page, that is the term that will be used to describe getting rid of (bankrupting) debts in bankruptcy.
Certain debts are non-dischargeable in a Chapter 7
Examples of these are alimony and child support obligations, taxes less than three (3) years old, student loans (with the sole exception listed below), and any debts procured by fraud (fraud debts may be dischargeable in a Chapter 13), incurring debt without a reasonably certain ability to repay the debt, and so forth.
Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters. Generally, Chapter 7 is the cheapest, quickest and least burdensome of the three major Chapters (the others being 11 and 13) of bankruptcy law. Costs and fees vary depending on the number of creditors you have, complexity of your case, and other factors. Click here to prepare for and schedule a free consultation.
If you are an individual, and meet the requirements, Chapter 7 allows you to discharge most or all of your debts. It allows you to do this regardless of how many assets you have or how much your creditors ultimately receive. It basically allows you to walk away from your debts and start over.
Corporations do not receive discharges of debts, but there still may be some benefit to allowing a trustee to liquidate the assets.
What are some of the disadvantages?
You are only able to receive a discharge after eight (8) years have passed since the commencement of the last case in which you received a discharge, although you can file another Chapter 13 case sooner. Thus, you should not file a bankruptcy if you need the option of doing it again in the next eight years.
If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 petition. Only under extraordinary circumstances will the Trustee operate a business.
Payments made to or on behalf of any relatives within twelve (12) months prior to filing your bankruptcy case are recoverable by the Trustee in your case. That's right. If you repaid money during that period to your brother, or made payments on a credit card that your mother let you use, they will have to pay back that money to your Trustee who will then distribute it equally to all your creditors. This is one of the biggest mistakes people make, often innocently because they don't know they will be filing a bankruptcy, but that's the law. In some instances, the Trustee will not attempt to get this money back and I can discuss those situations with you. This part of the law is designed to prevent debtors from preferring one creditor over another. The same is true for non-relatives, although the lookback period for them (such as credit cards, etc.) is only ninety (90) days and most people don't really care if their Trustee sues the credit card company to recover the money.
What about your credit?
The bankruptcy will appear on your credit report for up to ten (10) years after you file. Other accurate negative reports on your credit must be removed after seven (7) years (like late payments on credit cards, foreclosures, etc). However, according to my former clients, this is usually not as big a problem as most people think. Credit lending agencies know you won't be able to file another bankruptcy for at least 6 years, and therefore, they don't have that risk to bear. You will not get as high a credit limit as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn't be that difficult and you can rebuild your credit over time. What you will likely face is higher interest rates, required higher down payments, more points, etc. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc. In any event, I can provide you with excellent materials for helping you rebuild your credit should you so desire.
After your bankruptcy case is done I will assist you in correcting certain errors that might appear on your credit report. These errors can occur when a creditor fails to properly tell the credit bureaus that your debt should have been included in the bankruptcy.
A little about credit cards and cash advances
Any debt aggregating more than $500.00 from any single creditor for non-essential, "luxury" goods incurred within 90 days of filing or cash advances totaling over $750.00 on a credit card, incurred or taken within 70 days prior to filing the bankruptcy, are presumed to be nondischargeable. The obvious reason for this is to discourage would-be debtors from "running up" their credit charges, then filing bankruptcy. To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it's best not to use them at all). It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy. You should consult with your attorney about your personal situation. This particular provision is just a presumption of nondischargeability. It does not mean that if you wait more than the 70 or 90 days you are magically free from nondischargeability issues; nor does it mean that if you file the bankruptcy within the 70 or 90 days that you won't be able to discharge that debt. What it basically does is shift the burden of proving that the debt should or shouldn't be discharged onto the debtor during that 70 or 90 day time period (rather than on the creditor where it would otherwise be).
What debts can be discharged?
Many debts are dischargeable in a Ch. 7 case, with several notable exceptions. Your attorney can tell you which of your debts can be discharged, (or, take a look at our frequently asked questions) but a few of the most common or problematic ones are discussed below:
Discharging student loans
Most student loans are non-dischargeable.
Can you be denied a student loan because you or your parents file bankruptcy?
Section 525 of the Bankruptcy Code prohibits discriminatory treatment by any governmental or other student loan program on the basis of filing a bankruptcy. In other words, a student loan agency cannot deny your loan application based on the filing, by you or anyone you know, of a bankruptcy. If you would like to read Section 525 for yourself, click here!
Discharging taxes and removing tax liens
Certain types of tax obligations, such as income taxes, may be discharged under specific circumstances. Many required factors must be met before any tax can be discharged under Chapter 7 or Chapter 13. In Chapter 7, the minimum requirements for discharging federal or state income taxes are: (1) it has been over 3 years since the returns were last DUE (including extensions), (2) the returns were timely filed or it has been at least 2 years since the returns were filed, (3) there was no fraud involved or attempts to evade the tax, AND, (4) the taxes were not assessed within the last 240 days.
Discharging taxes is an extremely complicated area, and you should definitely consult with us for more information.
Tax Liens that have attached to property will survive a bankruptcy. What does that mean? It means that the lien will stay against your property regardless of your discharge of the underlying debt. So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you have the lien removed.
Discharging fraud judgments or debts where fraud may have been involved
Debts that you incurred which were the result of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud.
Can you be fired or denied employment because of a bankruptcy?
No. While an employer can usually find some reason to fire anyone, they cannot use bankruptcy as a basis for doing so. Again, this is set forth in Section 525 of the Bankruptcy Code. (See above)
Retirement accounts and pension plans
Whether or not you can exempt amounts held in a retirement account depends on numerous factors, including which set of exemptions you choose to use (you need to discuss this with your attorney--in Wisconsin, there are two sets of exemptions). According to the United States Supreme Court, if your retirement plan is ERISA approved, meaning that it contains a trust "anti-alienation" provision making it impossible to transfer or withdraw the funds prematurely, it is automatically exempt. Individual Retirement Accounts may be exempted only up to the amount reasonably necessary for the debtor's support and maintenance, taking into account all other anticipated and existing sources of income and expenses. Obviously, exempting retirement funds is very tricky and requires the expertise of an experienced bankruptcy attorney.
Getting rid of other liens, abstracts of judgments, and trust deeds recorded against your property
The bankruptcy code enables a broad range of powers which can enable you to avoid liens that were placed against your personal property or real property (like a house). It is too complicated of an analysis to deal with here, but if you have liens against your property, make sure to discuss this with your attorney.
Types of liens you may be able to get rid of include judgment liens recorded against your home or specific personal property. Also, in a Chapter 13 mortgages against your home may be able to be removed under certain specific circumstances. This is not an option in a Chapter 7, so make sure to check out the Chapter 13 page and consult with us.