Chapter 7 Bankruptcy - What You Need to Know

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The recent financial crisis in the United States has led to record levels of unemployment, an unprecedented number of foreclosures, and millions of hard-working people who are finding it harder and harder to keep their heads above water financially. If you find yourself falling farther and farther behind with your bills, have been notified that your home is in foreclosure, or fear that you might lose part of your paycheck to a wage garnishment, filing a bankruptcy case stops these collection actions and can be a huge relief.

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Chapter 7 Bankruptcy - What You Need to Know

  1. 1. CHAPTER 7 BANKRUPTCY – What You Need to Know ERIN B. SHANK CENTRAL TEXAS BANKRUPTCY ATTORNEY
  2. 2. 2 Filing a Chapter 7 bankruptcy is the quickest and most efficient way to alleviate financial strain and get you back on your road to a fresh financial start! The recent financial crisis in the United States has led to record levels of unemployment, an unprecedented number of foreclosures, and millions of hard-working people who are finding it harder and harder to keep their heads above water financially. If you find yourself falling farther and farther behind with your bills, have been notified that your home is in foreclosure, or fear that you might lose part of your paycheck to a wage garnishment, filing a bankruptcy case stops these collection actions and can be a huge relief. Filing a Chapter 7 bankruptcy is the quickest and most efficient way to alleviate financial strain and get you back on your road to a fresh financial start! THE U.S. BANKRUPTCY CODE The U.S. Congress has established laws that allow people to rid themselves of debt and keep their exempt assets. These laws are found in the U.S. Bankruptcy Code, a federal law that is applicable in all fifty states. Although various state laws do come into play when a bankruptcy case is filed, most of
  3. 3. 3 the laws affecting bankruptcy are federal and are found in the U.S. Bankruptcy Code. HOW IS A CHAPTER 7 BANKRUPTCY DIFFERENT FROM OTHER CHAPTERS? A Chapter 7 case is the most common type of bankruptcy filed in America. Because of our strong exemption laws, Debtors filing Chapter 7 in Texas are allowed to keep virtually all of their assets and discharge their debts. The only debts not dischargeable if a Chapter 7 case is filed are student loans, some taxes (some taxes are actually dischargeable), child support and debts incurred while driving while intoxicated or under the influence of drugs. Chapter 7 cases last only approximately three to four months and your wages are not garnished. It is the quickest, most efficient type of bankruptcy and should be considered the “first choice” if you are looking at bankruptcy relief. WHAT HAPPENS IF I FILE A CHAPTER 13 BANKRUPTCY CASE? Chapter 13 is another type of bankruptcy available for individuals with financial challenges. In a Chapter 13 case, the Debtor proposes a plan to repay, at least a portion of the unsecured debt, over a three to five year period. If a Chapter 13 is filed, the individual will actually be in an active bankruptcy case for three to five years, with his/her wages being garnished for the entire three to five year life of the Chapter 13 case. If an attorney is recommending a Chapter 13 case as the only alternative for your financial strains, you may want to seek a second opinion.
  4. 4. 4 WHAT IS THE MEANS TEST? In 2005, Congress amended the Bankruptcy Code to include a complicated form commonly referred to as the “Means Test”. This form most be completed by Debtors filing both Chapter 7 and Chapter 13 cases. The form actually requires that the Debtor’s income received in the six months before the case be calculated and then compared to income of others in the Debtors’ zip code according to the census. The form is actually quite complicated and therefore the assistance of an experienced bankruptcy attorney is strongly advised. However, do not think that your income automatically makes you qualified for only a Chapter 13, not a Chapter 7. The means test is required to be completed and filed in order to file both Chapter 7 and Chapter 13 cases and an experienced bankruptcy attorney can complete the form accurately and completely as long as you provide the attorney all of your pay stubs for the six months preceding the filing of the case and supply your attorney with the amount of other expenses and bills that you must pay each month. WHAT IS THE PROCESS FOR A CHAPTER 7 BANKRUPTCY? A chapter 7 bankruptcy begins when the petition is filed with the bankruptcy court. Prior to filing the bankruptcy petition, the debtor must take a brief consumer credit counseling course online. The minute the bankruptcy case if filed, an injunction is in place stopping all collection activity, including foreclosure, garnishment, lawsuits, harassing phone calls, etc. When the bankruptcy case is filed, complicated documents called Schedules, Statement
  5. 5. 5 of Financial Affairs and a Means Test must also be filed with the Court. These documents are complicated and signed under the penalty of perjury. Therefore, hiring an attorney to assist you complete these forms is highly advisable. When the case is filed, a Chapter 7 Trustee is also automatically appointed who reviews the documents filed in the case and conducts a brief meeting with the client and the client’s attorney, which is commonly referred to as a Section 341 meeting. The client responds to the Trustee’s questions under penalty of perjury, so it is very important that the testimony is truthful. The attorney who filed the case should attend this meeting with the Trustee. Most Section 341 meetings only last five to ten minutes. The Debtor must take a Debtor Education course, which is typically an online video or DVD, and the Debtor is discharged approximately 60 days after the Section 341 meeting is held. CAN I KEEP MY HOUSE AND CAR IN A CHAPTER 7 BANKRUPTCY? Absolutely! However, in order to keep your home and your car, you must continue to pay the lender who loaned you the money to purchase that asset, commonly referred to as the Purchase Money Lender. Due to strong exemption laws in Texas, you can also keep all of the contents of your home and tools of your trade as long as those assets are worth under $60,000.00 the day that the bankruptcy case is filed. IRA’s and retirement accounts are exempt as long as they are less than $1 million. In Texas, it is rare that an
  6. 6. 6 individual is not able to exempt all of the assets owned. Only in the rarest of cases is any asset “liquidated” in a Chapter 7 case. WILL ALL OF MY DEBTS BE DISCHARGED? A chapter 7 bankruptcy will result in almost all debts being discharged. There are a few types of debts that cannot be discharged through a Chapter 7 bankruptcy filing. Some common examples of debts that cannot be discharged include: Certain types of tax debts Spousal and child support Student loans Debts for personal injury caused by driving under the influence of drugs or alcohol. WHAT WILL HAPPEN TO MY CREDIT AFTER I FILE CHAPTER 7 BANKRUPTCY? While it is certainly understandable that debtors worry about their credit post-bankruptcy, the reality is that your credit rating is likely not good now if you are considering bankruptcy. The good news is that for many debtors, their credit rating actually improves as soon as the bankruptcy is discharged. This occurs for a number of reasons. First, your debt to income ratio typically improves significantly the day the bankruptcy is discharged. In addition, creditors know that you will not be able to file another Chapter 7 case for eight years. Shredding unsecured debt can also give you breathing room to
  7. 7. 7 bring past-due accounts such as your mortgage current. Many clients are able to discharge debts secured by cars that the Debtor no longer wants to own. These clients then purchase new cars while they are in a Chapter 7 bankruptcy. Not only do they have more dependable transportation, the new car financing helps improve their credit. Most Debtors are able to obtain a car loan for a new or used vehicle during the Chapter 7 case and immediately after the Chapter 7 discharge. Clients with steady and sufficient income can even obtain a mortgage to purchase a home within two years after filing a Chapter 7 case. Many clients have such large unsecured debt, they could not pay all of that debt off in two years. Therefore, filing a Chapter 7 case, discharging that debt, using the funds that they were using to pay the unsecured debt to save for a down payment for the purchase a home, can be a responsible way to address financial concerns. If you think that filing a Chapter 7 bankruptcy is the solution to your financial difficulties and you live in Central Texas, please feel free to call our offices in either Waco or Killeen, to schedule a free initial consultation - our phone number is 254-296-1161. In just a few short months you may finally be in a position to keep your head above water and start planning for a better future. REFERENCES Texas Bankruptcy Law, Texas Bankruptcy Exemptions NOLO, Texas Bankruptcy Exemptions
  8. 8. 7 About the Author About the Author Erin B. Shank With extensive training and years of experience helping families throughout Central Texas, Erin B. Shank is here to help you conquer your financial obstacles. Whether you need guidance and advice regarding bankruptcy, debt consolidation, tax debt or other financial problems, our friendly and qualified team can help you find solutions that will enable you to manage or eliminate your debt. Erin B Shank, PC 1902 Austin Avenue Waco, TX 76701 (254) 296-1161 1711 East Central Texas Expressway Suite 107 Killeen, TX 76541 (254) 690-4110 www.centraltexasbankruptcy.com

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