What is the benefit of Chapter 7?

Chapter 7 provides a debtor the opportunity to get a “discharge.” This gives a financial fresh start.

What exactly is a discharge?

A discharge is that which prevents a creditor from attempting to collect on the debt at a future time. It is a bar to collections and a bar to litigation. Essentially, it is complete and final forgiveness for a personal debt.

How often can one get a discharge?

If you received a discharge via Chapter 7 in the past, you must wait eight years before receiving a discharge through Chapter 7 again. If you received a discharge through Chapter 13, you must wait six years.

Do I Have to Qualify to File Chapter 7?

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This law establishes a “means test” which must be filled out to determine if someone can file for Chapter 7 or not. If the filer makes too much money, the debtor is forced into Chapter 13. Directing people toward Chapter 13 was the intended aim of the legislation.

Do I Pass the Mean’s Test?

The answer depends on where you live, how much you earn, and the size of your household. The IRS calculated the average income amount for each state. If you make below this amount, you immediately qualify for Chapter 7. If you make above this amount, you may still qualify for Chapter 7, but you must fill out the entirety of the long and complex means test form. The means test sets a standard for how much you are “allowed” to count toward food, utilities, rent, charitable contributions, etc. This is meant to prevent abuse and fraud.

What is the means test income standard set by the IRS for Pennsylvania?

For filing done after March 15, 2011, the amount for a household of one (1) is $44,897, for a family of two (2) it is $53,706, a family of three (3) is $67,113, a family of four (4) is $79,916, and for every member beyond four (4), add $7500. This amount is subject to change every few months.

Why is Chapter 7 called “liquidation?”

Upon filing, everything a debtor owns is subject to being sold by a bankruptcy trustee. The money earned is then split up amongst the various creditors, each getting an amount proportional to their percentage of the filer’s overall debt. Some property, however, is considered “exempt” and cannot be seized by the trustee.

What property is “exempt?”

The answer depends on the state you live in. In Pennsylvania, debtors are given the option of electing exemptions created by the state legislature or exemptions created by the United States Congress. The Pennsylvania state exemptions are generally not as broad as the federal exemptions, so most Pennsylvanians choose the federal exemption list. Usually, most filers keep everything they own. This is called a “no asset case” because there are no assets changing hands. The complete list of exemptions is located in section 522 of Title 11 of the United States Code. As a rule, household goods and furnishings are fully exempt, jewelry is exempt to $1450, equity in a vehicle is exempt to $3450, tools of the trade are exempt to $2175, home equity is exempt to $21,625, and there is a catch-all called a “wildcard” which may allow for exempting any other property up to an amount of $11,975, depending on whether there is any home equity exemption claimed.

Can I use another state’s exemptions?

The actual filing of the case must take place where you currently live. The choice of exemptions, however, is determined by the so-called “730 day rule.” The rule determines which state’s exemptions apply to you, based on residency. The rule was enacted because some states have broader exemptions than others. To prevent people from filing in these preferable states, a debtor must use the state exemptions of the jurisdiction where they have lived the last two years (730 days). If you have not lived in the same state for two years in a row, you must use the exemptions from the state where you lived the bulk of the six months just prior to the last 730 days. If no state qualifies, you may choose the federal exemptions.

Who is the trustee?

The trustee is a person appointed to oversee your case. This person is not a judge, although all cases filed are assigned to a judge in the event paperwork is filed which requires judicial review (such as a motion). Trustees are hired by the United States Trustee Program, which is a division of the Department of Justice. This private trustee is an attorney whose aim is to maximize the recovery for the creditors and review your paperwork for potential errors or omissions. This person will question you at the 341(a) Hearing to assure you promise, under oath, that you are who you say you are, that you listed all your property in the petition, and that you understand the relief you seek.

What is the 341(a) Hearing?

The 341(a) Hearing is the name given to the mandatory hearing which takes place pursuant to the law codified within Title 11 of the United States Code, Section 341. The hearing is intended to confirm your identity and that everything you own is catalogued within your bankruptcy petition. It is also an invitation to your creditors to come and ask you questions about your assets or the debt you owe them. Very rarely does a creditor show up at the hearing, however. The hearing often takes no more than a few minutes.

Where does the 341(a) Hearing take place?

The hearing takes place in an office building. It does not take place in a courtroom. In all likelihood, you will not need to ever step foot in a courtroom to get the discharge you seek in a Chapter 7.

What if I forgot to include something in my petition?

You are entitled to amend your petition if you remember something you did not originally include in your petition. The most important goal of the paperwork you file is to have it reflect the truth. So, while you should do your petition correctly the first time, the law recognizes that things may be forgotten and it allows you the chance to fix it.

How does a Chapter 7 case go?

A petition is filed. This petition is made up of numerous forms, the most important of which lists your assets and debts. You must also include proof of your qualification under the means test. When you file, an “automatic stay” is created by operation of law which prevents any creditor from taking any action to collect on the debt during the period of this automatic stay. The stay will remain in effect for the period the case is pending, or, if you filed another bankruptcy within the last year, at least 30 days after filing. This provides a cooling off period and allows your case to proceed without the need to constantly update your information in the forms you filed. About a month after you file, the 341(a) Hearing takes place. If you elect to keep your car or house and continue to make payments, a Reaffirmation Agreement should be filed. Finally, a few months after the 341(a) Hearing, notice will come that your case is closed and your debts have been successfully discharged.

How much is the filing fee for Chapter 7?

The courts must charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge. A waiver of fees is available to those who can demonstrate income less than 150% of the poverty level.

Can I keep my car in a Chapter 7?

If you have paid off your car and have equity in the vehicle, you can probably exempt its full value. If the vehicle is worth a significant amount, however, the vehicle may be liquidated by the trustee. You can probably simply pay the trustee the value he or she would have received had they seized the vehicle and sold it (reduced by the exemption available), so in this way you can buy your own car back from the trustee. Most vehicles are fully exempt, however.

If you are still paying off your car, you can elect to keep the vehicle and continue making payments. The Chapter 7 bankruptcy provides you the option of getting out of the loan and returning the vehicle, but you are also permitted the option of keeping it, provided you can show the trustee and court that you can afford it. Assuming you can make the payments after the bankruptcy, a Reaffirmation Agreement will likely be prepared by the auto loan company and submitted to you for signature. This will be filed with the court and, upon the conclusion of your case and associated discharge, you will retain the vehicle and owe on it under a new, valid, non-dischargeable loan.