Bankruptcy Chapter 7

Introduction to Bankruptcy Chapter 7

Both people and businesses file for Chapter 7 bankruptcy, and we will expand on that issue below. However, this site’s primary focus is on personal aka “consumer” bankruptcy news- people filing for Chapter 7 and Chapter 13 bankruptcy. Therefore, this post will primarily focus on Chapter 7 bankruptcy as it relates to people. Wherever you see the term “consumer bankruptcy,” just think “person.” We will focus on Chapter 7 bankruptcy as it relates to humans, not businesses.

According to data that we’ve gathered both from outside sources and from our statistics, there are more people looking for information on the term “bankruptcy Chapter 7” than on “Chapter 7 bankruptcy” (which we are fairly sure are the same concept – let us know in the comments if we are misinterpreting this). Apparently, when people want information on Chapter 7, they think about the general topic of “bankruptcy” with an added description of “Chapter 7.”

This may be similar to someone trying to locate a local event their city like a garage sale. They’d be looking for a garage sale…but, after typing “garage sale” into their browser, they quickly realize that “garage sale Phoenix Saturday” would be far more likely to return what they are looking for. After all, a computer can’t always tell where you are located…. Regardless, we won’t stand in your way…we’ll give you exactly what you want.

Bankruptcy Chapter 7 and Bankruptcy Access

While we plan on delivering some of our Chapter 7 bankruptcy material here, we will probably write more about Chapter 7 in the future to clean up any odds & ends that we miss. Chapter 7 is a fairly large topic and there are dozens (maybe hundreds?) of books on Chapter 7 bankruptcy alone. Therefore, we will undoubtedly write several more posts related to it. We will try to augment this post in the future by adding whatever material that we feel is needed to cover Chapter 7 bankruptcy as best we can.

Bankruptcy Background

If the research is to be believed, the concept of bankruptcy has existed for thousands of years. According to some sources, the modern concept of bankruptcy originated (or at least was reinstated) with the Romans.

But, what about today?

What Are The Major Reasons People File For Bankruptcy?

According to some sources, one of the major reasons people file for bankruptcy are overwhelming medical bills. Another reason may be a job loss. And finally, there have been some reports discussing gambling, casinos, and bankruptcy rates.

See this link for a more in depth discussion about the possible reasons consumers file for bankrupty:

http://www.usdoj.gov/ust/eo/public_affairs/articles/docs/abi01sepnumbers.html

When Do Debtors File For Bankruptcy?

There doesn’t seem to be a specific turning point or financial measure that indicates that it’s time to file for bankruptcy. However, when some people or businesses cannot pay their debts, they look into filing for bankruptcy protection, often in hopes of getting a fresh start by “discharging” some of their debts. We’ll deal with the concept of discharge below.

What is Chapter 7 Bankruptcy?

Bankruptcy in the US is federal law. And bankruptcy is outlined by Title 11 of the United States Code. The term “Chapter 7 bankruptcy” is an abbreviated way of referring to Chapter 7 of Title 11.

Chapter 7 is generally the simplest and quickest form of bankruptcy. Most people receive their discharge within 5-6 months of filing the case.

http://www.bankruptcyinfo.com/cm/custom/tocchapter7.asp

Generally speaking, Chapter 7 bankruptcy is what many people think of as standard, everyday bankruptcy. Chapter 7 is sometimes referred to as “straight” or “liquidation” bankruptcy and the US Code section dealing with bankruptcy can be found here:

http://www4.law.cornell.edu/uscode/11/usc_sup_01_11_10_7.html

Chapter 7 bankruptcy is still the most popular type of bankruptcy (see the 2007 statistics below). In Chapter 7 cases, the party filing for bankruptcy generally is seeking to “discharge” some of their “unsecured” debts.

However, some debts, like mortgages and car loans are considered “secured” and they generally survive bankruptcy filings. Secured debts are usually debts which have a specific piece of collateral pledged as security. In the example of a mortgage, the house is the security that backs the loan in the case of default. In English, that means if the homeowner doesn’t pay his mortgage, the bank may foreclose on his house. See these links for more on the differences between unsecured and secured debts:

http://www.orb.uscourts.gov/orb/Documents.nsf/232c86e7f0a2db8b882567b0005e1a39/ecee40593446c6be88256c7d00617af9?OpenDocument

http://www.banksite.com/tipsforborrowing/credit_options.htm

http://www.investopedia.com/terms/u/unsecureddebt.asp

Debtor, Creditors, Trustees, and More in Chapter 7 Bankruptcy

The person or business filing for bankruptcy is generally referred to as the “debtor” and the parties owed money are referred to as “creditors.” Since the debtor is the person in debt, they are easy to remember. And, the creditors were the ones who extended him credit. Just think of it like this: “debt: debtor” “credit: creditor.”

Besides the bankruptcy judge, there is another party assigned to most Chapter 7 cases: a “trustee.” A “trustee” is a court appointed officer of the court who gathers the debtor’s “non-exempt” property to sell & distribute the proceeds to creditors. The trustee is usually a practicing attorney in a Chapter 7 bankruptcy case. (This is paraphrased from: http://library.findlaw.com/2000/Feb/1/127828.html )

Another way of looking at a trustee’s duties is:

…the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors.

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter7.html

See these sites for more information on trustees’ duties in Chapter 7 bankruptcy cases:

http://www.moranlaw.net/chapter7.htm

http://www.nabt.com/FAQ.html

The Automatic Stay

At the start of a bankruptcy filing (including Chapter 7 bankruptcy), all collection efforts by creditors are supposed to stop immediately. This is referred to as the “automatic stay.” The automatic stay is supposed to provide a debtor protection from his creditors’ collection efforts while the bankruptcy case proceeds. See these sites for more information on details on the automatic stay:

http://www.law.cornell.edu/uscode/uscode11/usc_sec_11_00000362—-000-.html

http://www.moranlaw.net/stay.htm

Discharge

What does “discharging” of debts mean?

According to one definition…

Discharge is the legal foregiveness of debts.

http://www.findlaw.com

Or here is another definition of discharge:

A bankruptcy court’s erasure of the debts of a person or business that has filed for bankruptcy.

http://www.nolo.com/definition.cfm/Term/25AB8C0D-8A8B-452A-B4F894CDB84E6EE7/alpha/D/

So, just think of debt like this:

Imagine a gallon of water being dumped out of a large plastic jug. Woosh! The water is flushed out …it’s “discharged” and the jug is now empty. But, as we said above, usually only some types of unsecured debts are able to be discharged in bankruptcy. So, imagine some water is still left in the plastic jug.

Here are a few types of unsecured debts are generally not able to be discharged:

• Student Loans
  
• Taxes
  
• Fines related to criminal activity
  

There is a big list of additional types of non-dischargeable unsecured debts here:

http://www.bcsalliance.com/y_bankruptcy3.html

Exemptions

Bankruptcy Exemptions Generally:

When a Chapter 7 bankruptcy case begins, all of the debtors’ property is considered “property of the estate.” However, the bankruptcy code allows the debtor to keep some of her basic assets and therefore, some of the property is deemed “exempt”: effectively off limits to creditors.

The subject of Chapter 7 bankruptcy exemptions is very long and complex. It is far too large for this post, so we will summarize a few major points here. When a debtor files for bankruptcy, he is supposed to have a choice of which exemptions he’d like to claim. There are two categories of exemptions:

• The federal bankruptcy exemptions
  
• The debtor’s state bankruptcy exemptions.
  

However, some states have “opted-out” of the federal bankruptcy exemptions and the debtor must use the local state exemptions. That is, the debtor must use the exemptions provided by his local state non-bankruptcy laws.

A list of states that allow debtors to claim federal exemptions can be found here:

http://www.realworldlaw.com/stateoptout.html

And visit these two sites cover state specific bankruptcy exemptions:

http://www.thebankruptcysite.org/bankruptcy-exemptions/

http://www.bankruptcyaction.com/questions.htm#Exemptions

Though we have not checked the accuracy of either sites’ content, they are good places to start.

To further complicate an already complex topic, there have been several changes to bankruptcy exemptions during the last few years. Take a look at this article for example.

http://www.nolo.com/support/detail.cfm/ObjectID/6D4FE195-31A7-4009-8EBEC13DDA914F1A

Also, three of our prior posts covering changes in the South Carolina bankruptcy exemptions alone are here:

Filing for Bankruptcy Protection in South Carolina , South Carolina bankruptcies , Bankruptcy Exemptions in South Carolina.

Like we said, exemptions can get pretty intricate. Always consult with a bankruptcy lawyer.

Homestead Exemptions

One of the main exemptions a lot of debtors are concerned with is the homestead exemption.

Historically, some states, like Texas and Florida were known for allowing debtors generous homestead exemptions. However, after the bankruptcy laws were “reformed” in 2005, the protections offered by some state homestead exemptions may have become less powerful.

Involuntary & Voluntary Chapter 7 Bankruptcy

The majority of bankruptcy cases seem to be “voluntary.” That is, people file for bankruptcy themselves to deal with their debts.

However, some debtors may be forced into bankruptcy by their creditors: this is generally referred to as “involuntary” bankruptcy. Involuntary bankruptcy filings are generally used in business bankruptcies. A group of business creditors may file an involuntary bankruptcy petition if they think they will have a better shot at receiving payment through bankruptcy. There is more information on involuntary bankruptcy here:

http://bankruptcy.lawyers.com/Facing-Involuntary-Bankruptcy.html

http://www.lawdog.com/bkrcy/lib2a1.htm

http://www.flalawyer.com/involuntary.htm

Consumer Chapter 7 Bankruptcy vs. Business Chapter 7 Bankruptcy

As we mentioned in the beginning of this post, businesses can also file for Chapter 7 bankruptcy. While the concepts are almost the same, the end results are slightly different.

When a business completes a Chapter 7 bankruptcy, the business is often truly liquidated:

• Employees are let go.
  
• Unsecured debts are discharged.
  
• Machinery is auctioned off.
  
• And the business often closes its doors permanently.
  

Contrast this to when a living person completes a Chapter 7 bankruptcy. After a person’s case is complete, they continue living. They don’t disappear or fall off the end of the earth. Therefore, most consumer bankruptcy cases may be closer to reorganizations than liquidations, depending on how you look at it.

Here’s another way of saying that if you are confused:

…individuals can only reorganize, even though it is most commonly referred to as liquidation.

http://www.buildyourownbusiness.biz/post/index/39/2155/Personal-vs-Corporate-Bankruptcy.php

Bankruptcy: Chapter 7 vs. Chapter 13

When talking about consumer bankruptcy, many people think of bankruptcy as declaring defeat, putting up a white flag, and then looking to “start over.” If a debtor completes a Chapter 7 bankruptcy filing, they can discharge some of their unsecured debts and life is supposed to resume as normal. Chapter 7 is still the most popular type of bankruptcy filed today. See the section below for recent bankruptcy statistics from 2007.

*Though, see this article about “Zombie Debt” from the Wall Street Journal that we wrote about here. Yikes~!

The other big type of consumer bankruptcy is Chapter 13 bankruptcy. Chapter 13 is similar to Chapter 11 bankruptcy that companies often file in order to reorganize their operations. People generally don’t file for Chapter 11 bankruptcy. See this page for more information about Chapter 11 bankruptcy:

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter11.html

What is Chapter 13 Bankruptcy?

While Investopedia isn’t an official legal source, it’s got a fairly decent explanation of Chapter 13 that may make the concept a little easier to understand.

According to Investopedia, Chapter 13 bankruptcy is…

A U.S. bankruptcy proceeding in which the debtor undertakes a reorganization of his or her finances under the supervision and approval of the courts. As part of the reorganization, the debtor must submit and follow through with a plan to repay outstanding creditors within three to five years. In most circumstances, the repayment plan must provide a substantial payback to creditors - at least equal to what they would receive under other forms of bankruptcy - and it must, if needed, use 100% of the debtor’s income for repayment.

http://www.investopedia.com/terms/c/chapter13.asp

Apparently, the main difference between Chapter 7 and Chapter 13 bankruptcy is that in a Chapter 13 case, the debtor must repay his unsecured debts over time instead of discharging them. The debtor designs a repayment plan and works with creditors on repayment…

….These 2 articles from Findlaw.com provide more comparisons of Chapter 7 and Chapter 13:

http://bankruptcy.findlaw.com/bankruptcy/bankruptcy-chapter-13/chapter-13-bankruptcy-better(1).html

http://bankruptcy.findlaw.com/bankruptcy/bankruptcy-basics/bankruptcy_chapter_13_7_compare.html

Chapter 7 is the “wipe out” and Chapter 13 is the “work out”.

http://www.foreclosureuniversity.com/studycenter/freereports/options_of_homeowner.php

So, given that Chapter 7 looks like an easier way of discharging more debt, why would anyone file for Chapter 13 bankruptcy?

Some reasons could be:

• The debtor wants to keep some of his property.
  
• The debtor is forced to file Chapter 13 due to the new bankruptcy laws (see below).
  
• The debtor might want to repay creditors for ethical reasons.
  

Investopedia continues….

Chapter 13 bankruptcy differs from the outright foreclosure of an individual’s or business’s assets (seen in Chapter 7 bankruptcy) and the expensive and complicated restructuring of debts seen in Chapter 11 bankruptcy. Essentially, Chapter 13 allows a debt-laden person or sole proprietorship that still has significant income to submit an orderly plan to the courts to pay back debts over a few years. Doing so can provide advantages to the debtor not found in other forms of bankruptcy, such as preventing the foreclosure of a residence.

http://www.investopedia.com/terms/c/chapter13.asp

In other words, people filing for Chapter 13 may be able to save their houses from foreclosure if they work with creditors.

Here is the link to the official Chapter 13 information page from the US Bankruptcy Courts’ website. And, visit these 2 sites for more information on Chapter 13….

http://www.thebankruptcysite.org/chapter-13/

http://bankruptcy.lawyers.com/Chapter-13-Wage-Earner-Bankruptcy-Basics.html

Finally, as we will discuss in the next section, 2005’s revision of the bankruptcy code has made it more difficult for some consumers to file for Chapter 7 bankruptcy. This is primarily due to the new “means test” which the new bankruptcy laws specify that people filing for bankruptcy must now pass (or flunk depending on how you look at it).

Chapter 7 and the New Bankruptcy Laws

In 2005, Congress passed sweeping changes to the bankruptcy code with the enactment of The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This is a very large and very complicated piece of legislation that we will undoubtedly devote several lengthy posts to in the future. So, we will do our best to cover a few major points of Chapter 7 and BAPCPA here. However, we mentioned BAPCPA briefly in our post about credit card debt.

BAPCPA was enacted into law to supposedly stop unethical debtors from taking advantage of the Chapter 7 process.

Creditors groups tended to blame profligate spending. Their opponents said most bankruptcy filings arose from bad luck, such as job loss, medical expenses or loss of a spouse.

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1297

However, the controversial changes to the bankruptcy laws are still being fine tuned and debated, even 3 years later. In fact, some authors think that the new bankruptcy laws contributed to the credit crisis of 2008. BAPCPA added or changed several portions of the bankruptcy code. But, the big concept to keep in mind is that now some debtors with higher incomes may not be eligible to file Chapter 7 bankruptcy. Instead, they must file for Chapter 13 bankruptcy and workout repayment plans with their creditors.

See this link for more about BAPCPA:

http://www.usdoj.gov/ust/eo/bapcpa/index.htm

and see this post: Chapter 7 and Debtors Making 25K Every Month…

The Means Test and Chapter 7 Bankruptcy

One of the concepts of bankruptcy law in other countries (especially the UK) is “can pay, should pay.” In other words, if a debtor is able to pay his debts, he should pay them- or at least some of them. It seems that BAPCPA may be more in spirit with this concept.

Congress made means testing the cornerstone of a debtor’s eligibility to file under Chapter 7.

http://www.abiworld.org/AM/Template.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=48041

After the enactment of the BAPCPA, some non business (AKA consumer) debtors with incomes above their state’s median income may find themselves ineligible for Chapter 7. This is because BAPCPA now mandates that the debtor pass (or fail, depending on your view) a “means test.” Seemingly, Congress wanted to ensure that if a debtor has the “means” to repay a debt, the debtor should. The means test is complex, but an excellent graphic diagram related to it can be found here:

http://www.moranlaw.net/means_test_map.htm

But, see this very interesting article regarding how “Current Monthly Income” may be calculated:

http://www.bankruptcylawnetwork.com/2008/07/08/i-make-more-than-the-median-income-can-i-file-for-chapter-7/

Will the BAPCPA changes last if a new administration is elected in November 2008? That is certainly a topic that a lot of people are discussing.

The changes to the bankruptcy laws are tricky, so visit these excellent resources for more info on BAPCPA :

http://www.creditbloggers.com/2008/06/index.html

http://articles.latimes.com/2005/mar/29/nation/na-bankrupt29

http://ssrn.com/abstract=1157158

http://www.miller-mccune.com/article/738

Trends in Chapter 7 Bankruptcy

Apparently, the majority of bankruptcies today are filed by people (AKA “non businesses”). For the 12 months ending June 30th, 2007, of the roughly 751,000 total bankruptcy cases in the US, 727,000 were filed by non business entities – generally speaking, that usually means “consumers.” That’s almost 97%! So, if that time period is not out of the ordinary, most bankruptcies are filed by consumers.

And, of the roughly 751,000 TOTAL bankruptcy cases filed in the US for that time period, roughly 435,000 were non-business (again, we assume mainly consumer) Chapter 7 cases. That would make consumer Chapter 7 bankruptcy filings the most popular category of bankruptcy for that time period. The math works out to approximately 58%- a little more than ½. Here are the stats directly from the US Bankruptcy Courts’ website :

1. Here are the stats for the 12 months ending June 2007:
   

   http://www.uscourts.gov/bnkrpctystats/statistics.htm#june
   

2. And for those of you with Excel or another spreadsheet program, here is the direct link to the 2007 stats mentioned above. You’ll have to save them 1^st (Press “Save as”) and then open them with Excel:
   

   http://www.uscourts.gov/bnkrpctystats/june2007/bankrupt_f2table.xls

   

The Real Estate Bubble, Foreclosure, and Bankruptcy

The real estate collapse in many “bubble” states has resulted in reports of higher foreclosure rates than normal. Therefore, it’s not surprising to see many of these same states reporting double digit increases in the number of bankruptcy filings. We’ve reported on this trend extensively in the past…

See these four posts for example:

The LA Times Reports on Chapter 7 Filings
Bankruptcy Filings Increase 122%!
Bankruptcies in Western States
Bankruptcies And Foreclosures in Bubble States

But, while many “bubble” states have seen large increases in the number of people filing for bankruptcy, as of the date of this post, the top states for consumer bankruptcies per capita are:

• Tennessee
  
• Georgia
  
• Alabama
  
• Michigan
  

http://www.statemaster.com/graph/eco_ban_fil_percap-economy-bankruptcy-filings-per-capita

For more on the real estate collapse, visit these 2 blogs that exclusively cover the housing collapse:

http://thehousingbubbleblog.com/

http://housingdoom.com/

Increases in Chapter 7 Bankruptcy Filings Pre BAPCPA and After BAPCPA

If you look at the numbers here…

http://www.uscourts.gov/Press_Releases/bankruptcyfilings081607.html

… it seems there were a lot of people that rushed to file bankruptcy prior to the enactment of BAPCPA in 2005 (Though, 2006’s stats seem a bit odd given that BAPCPA supposedly went into effect in October 2005). These debtors may have been concerned that it might become more expensive and harder to qualify for Chapter 7 in years to come.

Read this article for more information about bankruptcy filings before and after BAPCPA.

http://www.bankruptcylawnetwork.com/2007/10/17/why-did-the-number-of-bankruptcy-filings-greatly-decrease-immediately-after-bapcpa-and-why-are-they-rapidly-increasing-now/

And see this post too:

1 Million Bankruptcies in The U.S. Forecast

Bankruptcy Chapter 7 FAQs:

Why would someone want to file for Chapter 7 bankruptcy?

Many people who file for Chapter 7 bankruptcy have large amounts of debt and are hoping to get a fresh start by wiping at least some of their slate clean. Debtors may want to get their finances in order and stop debt collectors’ collection efforts.

Do people still file bankruptcy after the changes to the bankruptcy laws?

Yes. However, it’s become tougher for some high income earners to qualify for Chapter 7. They may have to file for Chapter 13 and design a repayment plan.

Who can file for Chapter 7 bankruptcy?

That question is answered here.After the passage of 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, debtors now must now pass (or flunk depending on your view) a “means” test in order in order to be eligible for Chapter 7 bankruptcy. Debtors who are not eligible for Chapter 7 bankruptcy often must file for Chapter 13 bankruptcy instead.

Do debtors have to undergo credit counseling before they file for bankruptcy?

Generally speaking, yes. After the enactment of the new bankruptcy laws in 2005….

…with limited exceptions, people who plan to file for bankruptcy protection must get credit counseling from a government-approved organization within 180 days before they file. They also must complete a debtor education course to have their debts discharged….

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre41.shtm

Why would a debtor choose Chapter 7 bankruptcy instead of Chapter 13?

Some debtors might want to file for Chapter 7 bankruptcy instead of Chapter 13 in hopes of discharging much of their unsecured debts.

Does a bankruptcy affect a debtor’s credit?

It is possible that a bankruptcy can affect a debtor’s credit rating for up to 10 years.

Conclusion:

This has been our presentation covering Chapter 7 bankruptcy concepts as they relate to consumer bankruptcies. As we’ve shown both in this post and other state specific posts, the number of consumers filing for bankruptcy protection during the last few years is seemingly on the rise. In fact, in 2008, many states have reported double digit increases in the number of people filing for bankruptcy. And, the controversial revisions to the federal bankruptcy laws in 2005 are still being worked out and debated as of this writing. Finally, while it may be true that fewer people may now be eligible for Chapter 7 bankruptcy, the above statistics show that many people are still successfully filing for Chapter 7 to discharge some of their unsecured debts, even today.

See Also:

http://www.law.cornell.edu/uscode/11/

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter7.html

http://www.uscourts.gov/bankruptcycourts.html

http://www.uscourts.gov/bankruptcycourts/resources.html

http://www.abiworld.org//AM/Template.cfm?Section=Home

http://www.boulderbankruptcy.com/index.php/joomla-license

http://www.bankruptcyaction.com/questions.htm

http://www.alperlaw.com/bankruptcy_questions.html

http://www.budhibbs.com/

http://www.alabamaconsumerlawblog.com/

http://www.nytimes.com/2008/01/12/business/yourmoney/12money.html?fta=y

http://www.bankruptcyaccess.com/glossary-of-bankruptcy-terms/

http://www.thebklawyer.com/thebkblog/2008/04/14/alternatives-to-bankruptcy-if-your-debt-is-less-than-20000/

http://www.bankruptcylawnetwork.com/2008/06/03/discharging-credit-card-debt/

http://stevesathersbankruptcynews.blogspot.com/2007/06/assigned-credit-card-debt-problem-of.html

http://www.drlcny.com/blog/

Thank you for reading our discussion of bankruptcy Chapter 7.

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Bankruptcy Chapter 13
High Income Debtors and Chapter 7 Bankruptcy
Cut Up Your Credit Cards.
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