How to File for Chapter 7 Bankruptcy
Albin Renauer, J.D.; Robin Leonard, J.D.; and Stephen Elias, Attorney
October 2011, 17th Edition
File bankruptcy and find debt relief with this all-in-one-book!
When you have more debt than you can possibly pay off, the bankruptcy system is there to help -- and with How to File for Chapter 7 Bankruptcy, you'll find the clear and user-friendly information, advice and forms you need to get through the entire process.
If you're considering bankruptcy but can't afford to hire an attorney, the reliable, up-to-date information in How to File for Chapter 7 Bankruptcy will help you successfully complete your bankruptcy claim without breaking the bank.
First, you'll find out how to determine whether you qualify for Chapter 7 -- and whether it's the best way to deal with your debts. Then you'll find out how to:
- stop wage garnishments and attachments
- fill out and file all the forms
- cancel as much debt as possible
- deal with secured debts
- keep the maximum amount of property
- keep your home, if possible
- rebuild credit after bankruptcy
The 17th edition has been revised to reflect changes to state exemption laws, which determine what property you'd get to keep in bankruptcy, and the latest court decisions. You'll also get up-to-date legal forms, including the line-by-line instructions you need to fill them out. Plus, easy-to-use charts make looking up your state's laws a snap.
Please note: This book does not cover business bankruptcies, farm reorganizations or individual repayment plans (Chapter 13). For Chapter 13 bankruptcy, see Nolo's Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time.
“Clear instructions on when and how to fill out the necessary forms.”-Forbes
“Exceptionally clear…”-The New York Times
“A do-it-yourself bankruptcy book for people who can’t afford expensive lawyers.”-Newsweek
- Current Monthly Income Worksheet
- Personal Property Checklist
- Property Exemption Worksheet
- Homeowners’ Worksheet
- Judicial Lien Worksheet
- Bankruptcy Forms Checklist
- Bankruptcy Documents Checklist
- Median Family Income Chart
- Amendment Cover Sheet
- Notice of Change of Address
- Supplemental Schedule for Property Acquired After Bankruptcy Discharge
- Proof of Service by Mail
- Pleading Paper
After receiving his J.D. from the University of Michigan Law School in 1985, Albin Renauer worked for various public-interest law firms in the bay area and as a staff attorney for Chief Justice Rose Bird of the California Supreme Court.
He spent 17 years as an editor at Nolo, where he helped create numerous books and software programs, including the bestselling WillMaker. He also edited Law on the Net, the first online directory of legal resources and was the architect of Nolo's Webby Award winning website during the dot-com boom.
Currently, Albin is an independent web and database developer and Webby Award judge. His latest project is LegalConsumer.com, an online companion to his How to File for Chapter 7 Bankruptcy designed to help debtors file for bankruptcy.
Robin Leonard is a former attorney who gave up the law to become a rabbi. She is the author of many Nolo books including Solve Your Money Troubles: Debt, Credit & Bankruptcy and Credit Repair. She also helped write How to File for Chapter 7 Bankruptcy and A Legal Guide for Lesbian and Gay Couples.
Until his death in late 2011, Stephen R. Elias was a practicing attorney, active Nolo author, and president of the National Bankruptcy Law Project. He was an important part of Nolo for more than 30 years, and was the author or coauthor of many Nolo books, including Bankruptcy for Small Business Owners. Other titles include Special Needs Trusts: Protect Your Child's Financial Future, How to File for Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, and Legal Research: How to Find and Understand the Law. He was also one of the original authors of Nolo's bestselling WillMaker software. Steve held a law degree from Hastings College of Law and practiced law in California, New York, and Vermont before joining Nolo in 1980. He was featured in such major media as The New York Times, The Wall Street Journal, Newsweek, Good Morning America, 20/20, Money magazine, and more. The blog he began on bankruptcy and foreclosure law continues at Nolo's Bankruptcy & Foreclosure Blog.
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1. Should You File for Chapter 7 Bankruptcy?
- Bankruptcy in America: The Big Picture
- An Overview of Chapter 7 Bankruptcy
- Who Can File for Chapter 7
- Does Chapter 7 Bankruptcy Make Economic Sense?
- Alternatives to Chapter 7 Bankruptcy
2. The Automatic Stay
- Actions Prohibited by the Stay
- When the Stay Doesn’t Apply
3. Your Property and Bankruptcy
- Property in Your Bankruptcy Estate
- Property That Isn’t in Your Bankruptcy Estate
- Property You Can Keep (the Exemption System)
- Selling Nonexempt Property Before You File
4. Your House
- How Bankruptcy Affects a Typical Homeowner
- If You’re Behind on Your Mortgage Payments
- Will You Lose Your Home?
- Ways to Keep Your House
5. Secured Debts
- What Are Secured Debts?
- What Happens to Secured Debts When You File for Bankruptcy
- Options for Handling Secured Debts in Chapter 7 Bankruptcy
- Choosing the Best Options
- Step-by-Step Instructions
6. Complete and File Your Bankruptcy Paperwork
- Gather the Necessary Documents
- Get Some Information From the Court
- For Married Filers
- Required Forms and Documents
- Form 1—Voluntary Petition
- Form 6—Schedules
- Form 7—Statement of Financial Affairs
- Form 8—Chapter 7 Individual Debtor’s Statement of Intention
- Form 21—Statement of Social Security Number
- Form 22A—Statement of Current Monthly Income and Means-Test Calculation
- Form 201—Notice to Consumer Debtors Under § 342(b) of the Bankruptcy Code
- Mailing Matrix
- How to File Your Papers
- After You File
7. Handling Your Case in Court
- Routine Bankruptcy Procedures
- Amending Your Bankruptcy Papers
- Filing a Change of Address
- Special Problems
8. Life After Bankruptcy
- Newly Acquired or Discovered Property
- Newly Discovered Creditors
- Postbankruptcy Attempts to Collect Debts
- Attempts to Collect Clearly Discharged Debts
- Attempts to Revoke Your Discharge
- Postbankruptcy Discrimination
- Rebuilding Credit
9. Which Debts Are Discharged
- Debts That Will Be Discharged in Bankruptcy
- Disputes Over Dischargeability
10. Help Beyond the Book
- Debt Relief Agencies
- Bankruptcy Petition Preparers
- Bankruptcy Lawyers
- Legal Research
State and Federal Exemption Charts
- Residency Requirements for Claiming State Exemptions
- Retirement Accounts
- Special Considerations in States With “Bankruptcy-specific” Exemptions
Worksheets, Charts, and Forms
- Current Monthly Income Worksheet
- Personal Property Checklist
- Property Exemption Worksheet
- Homeowners’ Worksheet
- Judicial Lien Worksheet
- Bankruptcy Forms Checklist
- Bankruptcy Documents Checklist
- Median Family Income Chart
- Amendment Cover Sheet
- Notice of Change of Address
- Supplemental Schedule for Property Acquired After Bankruptcy Discharge
- Proof of Service by Mail
- Pleading Paper
Should You File for Chapter 7 Bankruptcy
Bankruptcy in America: The Big Picture........................................................ 7
Why People File for Bankruptcy............................................................... 7
Why You Shouldn’t Feel Guilty About Filing for Bankruptcy..................... 7
What About the Downside?...................................................................... 8
Bankruptcy Law: A Work in Progress....................................................... 9
An Overview of Chapter 7 Bankruptcy.......................................................... 9
What Bankruptcy Costs ......................................................................... 10
Mandatory Credit Counseling................................................................. 10
Filing Your Papers.................................................................................. 11
The Automatic Stay................................................................................ 12
Court Control Over Your Financial Affairs.............................................. 13
The Trustee........................................................................................... 13
The Meeting of Creditors (341 Hearing)................................................ 14
What Happens to Your Property............................................................. 14
Secured Debts....................................................................................... 15
Contracts and Leases............................................................................. 15
Personal Financial Management Counseling.......................................... 15
The Bankruptcy Discharge..................................................................... 15
After Bankruptcy.................................................................................... 16
Who Can File for Chapter 7........................................................................ 16
You Can Afford a Chapter 13 Repayment Plan...................................... 16
You Previously Received a Bankruptcy Discharge................................. 21
A Previous Bankruptcy Was Dismissed Within the Previous 180 Days... 21
You Haven’t Met the Credit Counseling Requirements.......................... 21
You Defrauded Your Creditors............................................................... 22
Your Filing Constitutes “Abuse”............................................................. 22
You Are Attempting to Defraud the Bankruptcy Court............................ 22
Does Chapter 7 Bankruptcy Make Economic Sense?................................. 23
Are You Judgment Proof?...................................................................... 24
Will Bankruptcy Discharge Enough of Your Debts?................................ 25
Will a Cosigner Be Stuck With Your Debts?........................................... 26
Will You Lose Valuable Property?.......................................................... 26
Alternatives to Chapter 7 Bankruptcy.......................................................... 29
Do Nothing............................................................................................. 29
Negotiate With Your Creditors................................................................ 30
Get Outside Help to Design a Repayment Plan...................................... 30
Pay Over Time With Chapter 13 Bankruptcy.......................................... 32
Family Farmers Should Consider Chapter 12 Bankruptcy...................... 34
Business Entities Might Benefit From Chapter 11 Bankruptcy................ 36
In the chapters that follow, we explain how to complete the required bankruptcy paperwork, what happens to your debts and property when you file for bankruptcy, how to get help with your bankruptcy, and how to pick up the financial pieces once your bankruptcy is final, among other things. But before you get to these important topics, you need to figure out whether you can—and should—file for Chapter 7 bankruptcy in the first place. This chapter will give you an overview of the bankruptcy process and help you decide whether Chapter 7 bankruptcy is right for you.
Bankruptcy in America: The Big Picture
Although you may not care much about the larger bankruptcy picture, understanding it will help you keep your situation in perspective. It may be reassuring to know that you’re not alone, even though you may feel isolated or even like a failure.
Why People File for Bankruptcy
Studies show that the most common reasons for filing for bankruptcy are:
• job loss, followed by an inability to find work that pays nearly as well
• medical expenses that aren’t reimbursed by insurance or government programs
• divorce or legal separation
• small business failures, and
• the foreclosure crisis.
Once a financial catastrophe strikes, many of us wind up having to take on significant debt just to weather the storm. If we saved enough, maybe we’d be ready for these unexpected twists and turns. But, for a variety of reasons, many of us spend too much and save too little. Let’s take a closer look at how we got so financially overextended.
Why You Shouldn’t Feel Guilty About Filing for Bankruptcy
The American economy is based on consumer spending. Roughly two-thirds of the gross national product has come from consumers like us spending our hard-earned dollars on goods and services we deem essential to our lives. If you ever had any doubt about how important consumer spending is to our economy, remember that President George W. Bush wasted no time after the events of September 11, 2001, in urging Americans to spend more. And many other government leaders told us that spending was our patriotic duty. As Americans, we have learned almost from birth that it’s a good thing to buy all sorts of products and services. A highly paid army of persuaders surrounds us with thousands of seductive messages each day that all say, “buy, buy, buy.”
These sophisticated advertising techniques (which often cross the line into manipulation) have convinced us to buy. And for those of us who couldn’t afford to pay as we went, credit card companies have been relentless in offering credit to even the most deeply indebted of us. In recent years, billions of credit card solicitations were mailed to U.S. residents each year—roughly ten solicitations for every man, woman, and child. And, perhaps surprisingly, the largest growth sectors for credit cards have been college students and people with bad credit ratings. The college students were targeted because they were customers of the future—and because their parents could be expected to bail them out if they got carried away with their new purchasing power. And people with bad credit were solicited in large numbers because creditors discovered that they would pay huge interest rates for debts run up on their cards, leading to equally huge profits.
Readily available credit has made it easy to live beyond our means and difficult to resist the siren songs of the advertisers. If, because of illness, loss of work, or just plain bad planning, we can’t pay for the things we need, feelings of fear and guilt are often our first responses. But, as we’ve also seen, the American economy has depended on our spending—the more, the better. In short, much of American economic life is built on a contradiction.
In this age of billion-dollar bailouts for poorly managed financial institutions, should you really feel guilt ridden about the debts you’ve run up? That’s something only you can decide, but remember that large creditors expect defaults and bankruptcies and treat them as a cost of doing business. The reason banks issued so many credit cards is that it has been very profitable, even though some credit card debts are wiped out in bankruptcies and never repaid.
Bankruptcy is a truly worthy part of our legal system, based as it is on forgiveness rather than retribution. Certainly, it helps keep families together, frees up income and resources for children, reduces suicide rates, and keeps the ranks of the homeless from growing even larger. And, perhaps paradoxically, every successful bankruptcy returns a newly empowered person to the ranks of the “patriotic” consumer. If you suddenly find yourself without a job; socked with huge, unexpected medical bills you can’t pay; or simply snowed under by an impossible debt burden, bankruptcy provides a chance for a fresh start and a renewed, positive outlook on life.
Will the 2009 Credit CARD Act Make It Harder to Get a Credit Card?
For decades, credit card companies flooded our mail boxes with offers of “new and improved” cards, many at attractively low interest rates. Those of us with less than stellar credit (the subprime market) received just as many offers, although at much higher rates of interest. Even after receiving a Chapter 7 bankruptcy discharge, consumers could still expect to receive credit card solicitations, at interest rates pushing 30%.
Not only was credit easily available, but we also were required to make only “minimum payments,” with the result that many of us came to hold multiple cards with perpetual balances generating compound interest. Worse, we were subjected to a growing array of unfair practices, from raising our interest rates without advance notice because of late payments on unrelated bills, to charging late fees and penalties when we didn’t meet the issuer’s ever-changing rules on timing.
In 2009, Congress addressed some of these unfair practices with the Credit Card Disclosure and Accountability Act of 2009. The provisions of the Credit CARD Act, as it’s often called, became effective in 2010. Highlights of the Act include limiting interest rate hikes in certain situations, providing more disclosures in plain language, eliminating some unfair billing practices, and limiting the availability of cards to consumers under the age of 21. Notably, the Act does not put a cap on interest rates.
How the Credit CARD Act will affect the ability of consumers to get credit cards in the future still remains to be seen. In opposing the Credit CARD Act, the credit card industry warned that it would have to increase interest rates and tighten up lending criteria for those with poor credit. So far, there are no reports that credit card companies have staunched the flow of credit card offers to everyone, including those with poor credit histories. However, this may change in the ensuing months. At the very least, if you have less than stellar credit, you should expect high interest rates.
For an in-depth discussion of the new provisions in the Credit CARD Act, as well as how to wisely choose and use credit cards, get Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Attorney Margaret Reiter (Nolo).
The Foreclosure Crisis
In the last few years, the foreclosure crisis has struck with a vengeance. For a variety of reasons, vast numbers of homeowners are in over their heads on their mortgage debt. Many are turning to bankruptcy either to hold on to their homes or to dispense with the considerable civil and tax liabilities that often follow in the wake of losing a home. As we point out in later chapters, filing either a Chapter 7 or a Chapter 13 bankruptcy brings foreclosure sales to a halt. After that, Chapter 13 gives you time to make up the missed payments over three to five years. Chapter 7 has no such remedy. However, if you are current on your mortgage when you file, Chapter 7 can make your mortgage more affordable by getting rid of your other debts. The Foreclosure Survival Guide, by Stephen Elias (Nolo), explains in detail how Chapter 7 and Chapter 13 bankruptcy can help you deal with the threat or reality of foreclosure.
What About the Downside?
Bankruptcy can also have its disadvantages—economically, emotionally, and in terms of your future credit rating. The bankruptcy process can get intrusive. As part of your public filing, you are required to disclose your financial activities during the previous year or two, as well as your debts and current property holdings.
Bankruptcy also carries a certain stigma. (Otherwise, why would we spend so much time talking you out of feeling bad about it?) Some people would rather struggle under a mountain of debt than accept the label of “bankrupt.”
If you have a bankruptcy on your record, you will need to convince those who have business dealings with you that you made every effort to meet your financial obligations before resorting to bankruptcy. Whether you are renting or buying a home, buying or leasing a car, or seeking financing for a business, your bankruptcy will be counted against you, at least for several years (and it will stay on your credit report for ten years). And, although you may be able to get credit cards after bankruptcy, you will have to pay the highest interest rate, at least for a while.
While these facts may seem like downsides, they collectively have an upside. For several years, you will find it very easy to be debt free. In fact, you will have to pay as you go because it will be tough to get credit. Filing for bankruptcy can be a harsh wakeup call, one that will give you a new perspective on the credit system. A bankruptcy temporarily removes you from the credit hamster wheel and gives you some time and space to learn to live credit free (or, at least, to fashion a saner relationship to the credit industry).
Bankruptcy Law: A Work in Progress
In October 2005, Congress passed a law that changed the way bankruptcy works. One of the purposes of this law, known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), was to cut down on Chapter 7 bankruptcies. BAPCPA was drafted by lobbyists for the credit card and banking industries, who assumed that many would-be bankruptcy filers could afford to pay back at least some of their debt, and should therefore be required to do so.
The hallmark of BAPCPA is what’s known as the means test—a questionnaire that helps determine whether filers have sufficient “disposable” income to fund a Chapter 13 bankruptcy plan. Those with higher incomes fail the test and can be forced out of Chapter 7 bankruptcy. As it turns out, however, very few people need to worry about this test: Contrary to what the supporters of the BAPCPA thought, the vast majority of those who use Chapter 7 have little or no income to spare. As a result, almost everyone who wants to file for Chapter 7 bankruptcy can still do so.
There are numerous additional changes in the law that make filing for Chapter 7 bankruptcy somewhat more difficult and, if you use an attorney, much more expensive. But, as long as you follow our step-by-step instructions, you should have no trouble handling your own case.
In addition to the legislative changes wrought by BAPCPA, this 17th edition of How to File for Chapter 7 Bankruptcy incorporates numerous interpretations of the 2005 law handed down by the nation’s bankruptcy courts. But there are many more interpretations to come. In addition to bankruptcy judges, who are still turning out new interpretive decisions every day, federal district courts, bankruptcy appellate panels (BAPs), and federal Circuit Courts of Appeal are available to review these decisions upon the request of a party. Even the U.S. Supreme Court is now getting involved. What all this means, of course, is that the day after this book hits the shelves, a new case may add some spin on a procedure or rule that you really need to know about. To make sure you have the most up-to-date information and forms, check for updates at Nolo’s website, www.nolo.com/updates (select the title of this book).
An Overview of Chapter 7 Bankruptcy
This book explains how to file for Chapter 7 bankruptcy. (It’s called “Chapter 7” because that’s where it appears in the bankruptcy code.) Chapter 7 bankruptcy is sometimes called “liquidation” bankruptcy—it cancels most types of debt, but you have to let the bankruptcy trustee liquidate (sell) your nonexempt property for the benefit of your creditors. Most people who use Chapter 7 get to keep all their property, but some states are more generous than others in this regard. (You can find a list of each state’s exemptions, as well as the federal exemptions, in Appendix A; Ch. 3 delves into the subject of exemptions in much more detail.)
Here is a brief overview of the Chapter 7 bankruptcy process, from start to finish.
What This Book Doesn’t Cover
This book explains the procedures for filing a Chapter 7 bankruptcy if you are an individual, a married couple, or a small business owner with personal liability for your business debts. This book doesn’t cover:
• Chapter 13 bankruptcy. Chapter 13 allows filers to keep their property and repay some or all of their debt over three to five years. For more information on Chapter 13, see “Pay Over Time With Chapter 13 Bankruptcy,” below; if you decide to file for Chapter 13 bankruptcy, you’ll need a copy of Chapter 13 Bankruptcy, by Stephen Elias and Robin Leonard (Nolo).
• Bankruptcy for business partnerships. If you’re a partner in a business (with someone other than your spouse), filing for a personal bankruptcy will affect your business; we don’t address that situation in this book.
• Bankruptcy for major stockholders in privately held corporations. If you’re a major owner of a private corporation, filing for bankruptcy could affect the corporation’s legal and tax status. This book doesn’t cover your situation.
• Business reorganization. This book doesn’t cover Chapter 11 of the bankruptcy laws, which allows a business to continue operating while paying off all or a portion of its debts under court supervision.
• Farm reorganization. A special set of bankruptcy statutes, called Chapter 12, lets family farmers continue farming while paying off their debts over time. Chapter 12 isn’t addressed in this book.
If you are a sole proprietor, consider getting a copy of Bankruptcy for Small Business Owners: How to File for Chapter 7, by Stephen Elias and Bethany K. Laurence (Nolo). This book has information especially useful to business operators who wish to file for Chapter 7 bankruptcy.
However, because a business entity (such as a corporation or LLC) must be represented by a lawyer in bankruptcy, if you are the owner of such an entity (even a sole owner), Bankruptcy for Small Business Owners won’t be able to guide you through the bankruptcy process.
What Bankruptcy Costs
The whole Chapter 7 bankruptcy process takes about three months, costs $299 in filing fees (unless you get a waiver), and usually requires only one brief meeting, out of court, with the bankruptcy trustee—the official appointed by the bankruptcy judge to process your bankruptcy. If you use a lawyer, you can expect to pay an additional $1,500 or more in legal fees. Of course, you can save most of this money by representing yourself with the help of this book (and, perhaps, typing services from a bankruptcy petition preparer, or legal advice from a limited practice lawyer). See Ch. 10 for information on finding lawyers and petition preparers.
Mandatory Credit Counseling
Before you can file for bankruptcy, you must consult a nonprofit credit counseling agency. The purpose of this consultation is to see whether there is a feasible way to handle your debt load outside of bankruptcy, without adding to what you owe.
To qualify for bankruptcy relief, you must show that you received credit counseling from an agency approved by the U.S. Trustee’s office within the 180-day period before you file.
Once you complete the counseling, the agency will give you a certificate showing that you participated. It will also give you a copy of any repayment plan you worked out with the agency.
There are a few exceptions to this counseling requirement. You don’t have to participate if you are in the military on active duty, you are incapacitated, or you have a disability that prevents you from participating. You also don’t have to get counseling if there is no agency available to you. For example, one court excused a debtor’s failure to get counseling because no agency could provide counseling in the debtor’s Creole language, and the debtor could not afford to hire an interpreter. (In re Petit-Louis, 344 B.R. 696 (S.D. Fla. 2006).)
Rules Counseling Agencies Must Follow
In addition to providing services without regard to your ability to pay, counseling agencies have to meet a number of other requirements. They must:
• disclose to you their funding sources, their counselor qualifications, the possible impact of their proposed plan on your credit report, the cost of the program, if any, and how much of the costs you will have to pay
• provide counseling that includes an analysis of your current financial condition, factors that caused the condition, and how you can develop a plan to respond to the problems without adding to your debt
• use trained counselors who don’t receive any commissions or bonuses based on the outcome of the counseling services (that is, the counselors may not receive kickbacks, although kickbacks to the agency may be legal), and
• maintain adequate financial resources to provide continuing support services over the life of any repayment plan. For example, if they propose a three-year payment plan, they must have adequate reserves to service your case for three years.
The purpose of credit counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet. Counseling is required even if it’s perfectly clear that a repayment plan isn’t feasible (that is, your debts are too high and your income is too low) or you have debts that you find unfair and don’t want to pay. (Credit card balances inflated by high interest rates and penalties are particularly unpopular with many filers, as are emergency room bills and deficiency judgments based on auctions of repossessed cars.)
The law requires only that you participate—not that you go along with whatever the agency proposes. Even if a repayment plan is feasible, you aren’t required to agree to it. However, if the agency does come up with a plan, you must file it along with the other required bankruptcy paperwork. See Ch. 6 for more information on the credit counseling requirement, including how to get the certificate of completion that you’ll have to file with your other bankruptcy papers.
Filing Your Papers
To begin a Chapter 7 bankruptcy case, you must complete a packet of forms and file them with the bankruptcy court in your area. Many filers are shocked to see the long list of documents that might be required in a Chapter 7 case, particularly after Congress added even more paperwork requirements in the most recent revision of the bankruptcy law. But don’t be alarmed: Many of these forms require very little time and effort to fill in, and most filers won’t have to complete them all. Just take things one step at a time, following the detailed instructions in Ch. 6, and you’ll do just fine.
Once you file the papers described below, the court will send a notice of your bankruptcy filing to all of the creditors listed in your bankruptcy documents. You will get a copy as well. This notice (called a “341 notice” because it is required by Section 341 of the bankruptcy code) sets a date for the meeting of creditors (see “The Meeting of Creditors,” below), provides the trustee’s name, address, and telephone number, and gives creditors the deadlines for filing objections to your bankruptcy or to the discharge of particular debts.
The Voluntary Petition
You begin a Chapter 7 case by filing a Voluntary Petition: the official court form that requests a bankruptcy discharge of your debts. This form asks for some basic information, including your name, address, and the last four digits of your Social Security number; information about your creditors, debts, and property; and whether you have lived, maintained a residence or business, or had assets in the district where you are filing for most of the 180-day period before you file (this gives you the right to file in that district). You’ll find line-by-line instructions for completing the Voluntary Petition in Ch. 6.
You will have to submit quite a few more documents, either when you file the petition or (with a few exceptions) within 14 days after you file. These additional documents include lists of your creditors, assets, debts, income, and financial transactions prior to filing; copies of your most recent federal tax return and wage stubs; a list of property you are claiming as exempt (that is, property that you are entitled to keep even though you are filing for bankruptcy); information on what you plan to do with property that serves as collateral for a loan (such as a car or home); proof that you have completed your prefiling credit counseling; and, later in your bankruptcy case, proof that you have completed budget counseling.
Perhaps the most important form—made necessary by the new bankruptcy law—requires you to compute your average gross income during the six months prior to your bankruptcy filing date and compare that to the median income for your state. If your income is more than the median, the same form takes you through a series of questions (called the “means test”) designed to determine whether you could file a Chapter 13 bankruptcy and pay some of your unsecured debts over time. The outcome of this test will largely determine whether you can file for Chapter 7 bankruptcy. (See “Who Can File for Chapter 7,” below, and Ch. 6 for detailed information about these calculations.)
After you file, you may want to amend some or all of your forms to correct mistakes you discover or to reflect agreements you reach with the trustee. Amending these forms is fairly simple; we explain how to do it in Ch. 7.
If you need to stop creditors quickly, you can do so without filing all of the bankruptcy forms we describe in Ch. 6 (although you’ll eventually have to complete the full set). In some situations, speed is essential. For example, if you face foreclosure and your house is going to be sold in a few days, or your car is about to be repossessed, filing an emergency petition will stop the repossession or foreclosure cold.
To put an end to collection efforts, you can simply file the three-page Voluntary Petition form, a form providing your Social Security number, and a document known as the Creditors’ Matrix, which lists the name, address, and zip code of each of your creditors. On the petition, you’ll have to either swear that you’ve completed credit counseling or explain why emergency circumstances prevented you from doing so. The automatic stay, which stops collection efforts and lawsuits against you, will then go into effect. (Ch. 2 covers the automatic stay in detail.) You’ll have 14 days to file the rest of the forms. (Bankruptcy Rule 1007(c).)
You should file on an emergency basis only if you absolutely must. Many emergency filers fail to meet the 14-day deadline and have their petitions dismissed as a result. Because you are rushing, you are more likely to make mistakes that have to be corrected later, which just adds work and potential errors to the process. But if filing an emergency petition is the only way to stop a potentially disastrous creditor action, go for it. Just remember the deadline for filing the rest of the forms.
The Automatic Stay
Often, people filing for bankruptcy have faced weeks, months, or even years of harassment by creditors demanding payment and threatening lawsuits and collection actions. Bankruptcy puts a stop to all this. Filing your bankruptcy petition instantly creates a federal court order (called an “Order for Relief” and colloquially known as the “automatic stay”) that requires your creditors to stop all collection efforts. So, at least temporarily, most creditors cannot call you, write dunning letters, legally grab (garnish) your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits. As explained in Ch. 2, the automatic stay is not absolute: Some creditors are not affected by the automatic stay, and others can get the stay lifted to collect their debts, as long as they get the judge’s permission first.
Renters beware. The automatic stay’s magic does not extend to certain eviction actions. Even if the automatic stay does kick in to temporarily halt your eviction when you file for bankruptcy, the bankruptcy court will almost always lift the stay and let the eviction proceed, upon the landlord’s request. See Ch. 2 for more information on the automatic stay and eviction proceedings.
Court Control Over Your Financial Affairs
By filing for bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy trustee (see “The Trustee,” below). While your case is open, you can’t sell or give away any of the property that you own when you file without the trustee’s consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy. You are also allowed to borrow money after you file.
The bankruptcy court exercises control over your property and debts by appointing an official called a “trustee” to manage your case. Your trustee’s name and contact information will be in the official notice of filing you receive in the mail several days after you file your petition. The trustee (or the trustee’s staff) will examine your papers to make sure they are complete and to look for property to sell for the benefit of your creditors. The trustee’s primary duty is to see that your creditors are paid as much as possible. The trustee is mostly interested in what you own and what property you claim as exempt, but will also look at your financial transactions during the previous year (in some cases these can be undone to free up assets that can be distributed to your creditors). The more assets the trustee recovers for creditors, the more the trustee is paid.
How Trustees Get Paid
Trustees receive a flat fee of $60 per Chapter 7 case. In addition, trustees are entitled to a percentage of the funds they disburse to the debtors’ creditors: 25% of the first $5,000 disbursed, 10% of the next $45,000, and so on. Most Chapter 7 cases involve no disbursements (because typically there are no nonexempt assets), so trustees usually have to settle for the $60 fee. But these fee rules give trustees a financial incentive to look closely at bankruptcy filings, especially if debtors appear to have some valuable property. Trustees can earn a “commission” if they can actually grab some property, sell it, and distribute the proceeds to creditors.
Some courts appoint full-time trustees (called “standing” trustees) to handle all cases filed in that courthouse. Other courts appoint trustees on a rotating basis from a panel of bankruptcy lawyers (called “panel” trustees). Either way, the trustees have the same responsibilities. However, full-time trustees usually do a better job of scrutinizing bankruptcy papers for possible mistakes, whether intentional or accidental.
The U.S. Trustee
The U.S. Trustee Program is a division of the U.S. Department of Justice. Each U.S. Trustee oversees several bankruptcy courts. Individual cases within those courts are assigned to assistant U.S. Trustees, who also employ attorneys, auditors, and investigators. U.S. Trustees work closely with their Department of Justice colleagues from the FBI and other federal agencies to ferret out fraud and abuse in the bankruptcy system. The U.S. Trustees (and the assistant U.S. Trustees) also supervise the work of the panel or standing trustees, who are appointed by the courts.
You will most likely encounter the U.S. Trustee in one of the following cases:
• Your bankruptcy papers suggest that you may be engaging in fraudulent behavior.
• Your case is selected for a random audit (one out of every 250 bankruptcy cases is supposed to be audited).
• Your bankruptcy schedules show that you don’t pass the means test (explained later in this chapter).
• You use a bankruptcy petition preparer (BPP) to help you with your paperwork (see Ch. 10 for more on BPPs), and the trustee believes that the BPP has done something illegal—typically, that the BPP has not just helped you complete your papers, but has given you legal advice, something that only lawyers are allowed to do. In this situation, your bankruptcy won’t be affected, but the U.S. Trustee may want you to act as a witness against the BPP.
The Meeting of Creditors (341 Hearing)
As explained above, you will receive a notice of the date of the creditors’ meeting (also called the 341 hearing) shortly after you file your bankruptcy papers. This meeting is typically held somewhere in the courthouse or federal building (but almost never in a courtroom). The trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the documents you filed. For instance, the trustee might ask how you arrived at the value you assigned to an item of property listed in your papers, whether you have given anything away in the last year, and whether the information you put in your papers is 100% accurate. All together, this questioning rarely takes more than a few minutes. Creditors rarely attend this meeting—but if they do, they will also have a chance to question you under oath, usually about where property that serves as collateral to a loan is located or about information you gave them to obtain a loan. In most bankruptcy cases, this will be the only personal appearance you have to make. We discuss the creditors’ meeting in more detail, and explain other situations when you might have to appear in court, in Ch. 7.
What Happens to Your Property
In your bankruptcy papers, you’ll be asked which items of your property you claim as exempt. Each state allows debtors to keep certain types of property or a certain amount of equity in that property. The exemptions available to you depend on where you have lived prior to filing for bankruptcy. (For more information, see Ch. 3.)
If, after the creditors’ meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. The trustee is highly unlikely to search your home or seize your property, but will order you to turn over property listed in your schedules or identified during your creditors’ meeting or in other proceedings. If you don’t turn over the property, the bankruptcy judge can order you to do it (and hold you in contempt if you don’t). Plus, the court can dismiss your bankruptcy petition if you fail to cooperate with the trustee.
If your nonexempt property isn’t worth very much or would be hard to sell, the trustee may “abandon” it—which means that you get to keep it, even though it’s nonexempt. As it turns out, all of the property that most Chapter 7 debtors own is either exempt or essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up losing any of their property, unless the property is collateral for a secured debt. (See “Secured Debts,” below, and Ch. 5 for a detailed discussion of secured debts.)
If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and motor vehicles. If you are behind on your payments, a creditor can ask to have the automatic stay lifted so it can repossess the property or foreclose on the mortgage. However, if you are current on your payments, you can keep the property and continue making payments as before—unless you have built up enough nonexempt equity in the property to make it worthwhile for the trustee to sell it for the benefit of your unsecured creditors. (See Ch. 5 for more information on secured debts.)
If a creditor has recorded a lien against your property without your consent (for example, because the creditor obtained a money judgment against you in court), that debt is also secured. However, in some cases and with certain types of property, you may be able to wipe out the debt and keep the property free of the lien. This is called “lien avoidance,” and it is also covered in Ch. 5.
Contracts and Leases
If you’re a party to a contract or lease that’s still in effect, the trustee may take your place as a party to the contract—known as “assuming” the contract—and enforce it for the benefit of your unsecured creditors. Alternatively, the trustee can decide not to step in as a party to the contract—called “rejecting” the contract—in which case you get to decide whether you want the contract to continue in force or not.
For example, suppose you have a five-year lease on some commercial property when you file for bankruptcy. If you’ve got a good lease (perhaps at a below-market rate, with a few years left on it, for property in an up-and-coming part of town), the trustee may decide to assign the lease to a third party in exchange for money to pay your unsecured creditors. In this situation, the trustee will assume the lease and assign it to the highest bidder, even if the lease forbids assignments: The trustee’s rights trump any transfer restrictions in the lease. However, if the trustee doesn’t think selling the lease is worth the trouble (as is almost always the case), the trustee will take no action, which is the same thing as rejecting the lease. Of course, you and the landlord can renew the lease at any time.
Under the new bankruptcy law, you can assume leases on personal property (such as a car or business equipment) rather than having the trustee assume them. However, you will be allowed to do this only if you are able to cure any defaults on the lease, as required by the creditor. (Ch. 6 provides instructions for completing Schedule G, a required bankruptcy form in which you list all current contracts and leases, and the Statement of Intention, another required form in which you tell your creditors and the trustee whether you would like to assume any leases.)
Personal Financial Management Counseling
All debtors must attend a two-hour course on managing finances in order to receive a bankruptcy discharge. This is sometimes referred to as budget counseling, debtor evaluation, or predischarge counseling. You must take this course from an agency approved by the U.S. Trustee Program. (For a list of approved agencies, go to the U.S. Trustee’s website, www.usdoj.gov/ust, and click “Credit Counseling & Debtor Education.”) You will be charged fees on a sliding scale, but you can’t be denied services because of your inability to pay. Once you complete your counseling, you must file a certification form with the court.
The Bankruptcy Discharge
About 60 days after the 341 hearing, you will receive a Notice of Discharge from the court. This notice doesn’t list which of your particular debts are discharged, but it provides some general information on the back of the form about what kinds of debts are and are not affected by the discharge order. In most cases, all debts are discharged except:
debts that automatically survive bankruptcy (child support, most tax debts, and student loans are examples), and
debts that the court has declared nondischargeable as a result of an action brought by a creditor, as might be the case for debts you incurred through fraudulent or willful and malicious acts.
Ch. 9 explains which debts are—and are not—discharged at the end of your bankruptcy case. See also “Who Can File for Chapter 7,” below, which explains the circumstances in which your entire discharge—not just the discharge of a specific debt—may be denied.
Once you receive your bankruptcy discharge, you are free to resume your economic life without reporting your activities to the bankruptcy court unless you receive (or become eligible to receive) an inheritance, insurance proceeds, or proceeds from a divorce settlement within 180 days after your filing date. In that case, you have a duty to report those assets to the trustee. If you don’t, and they are discovered, the trustee (and the court, if necessary) can order you to turn over the assets and your discharge may be revoked.
After bankruptcy, you cannot be discriminated against by public or private employers solely because of the bankruptcy, although this ban on discrimination has exceptions (discussed in Ch. 8). You can start rebuilding your credit almost immediately, but it may take several years (or more) to get decent interest rates on a credit card, mortgage, or car note. You can’t file a subsequent Chapter 7 bankruptcy case until eight years have passed since your last filing date. You can file for Chapter 13 bankruptcy any time, but you can’t get a Chapter 13 discharge unless you file at least four years after you filed the earlier Chapter 7 case.
What If You Change Your Mind About Chapter 7 Bankruptcy After Filing?
If you don’t want to go through with your Chapter 7 bankruptcy after you file, you can ask the court to dismiss your case. A court will generally agree, as long as the dismissal won’t harm your creditors’ interests. For example, if you have substantial nonexempt equity in your house, the court will probably deny your dismissal request so the trustee can sell the house to make some money for your unsecured creditors. (See Ch. 4 for more on what happens to your home in bankruptcy.)
As an alternative to having your case dismissed, you may exercise your one-time “right to convert” the case to a Chapter 13 bankruptcy, as long as you really intend to propose and follow a repayment plan. This will keep your property out of the trustee’s hands, because in Chapter 13 you don’t have to surrender property if you complete your repayment plan. (You do, however, have to pay your unsecured creditors at least the value of your nonexempt property, as explained in “Pay Over Time With Chapter 13 Bankruptcy,” below.)
Who Can File for Chapter 7
Filing for Chapter 7 bankruptcy is one way to solve debt problems, but it isn’t available to everyone. Here are some situations in which you may not be able to use Chapter 7.
You Can Afford a Chapter 13 Repayment Plan
Under the old bankruptcy rules, most filers were free to choose the type of bankruptcy that seemed best for them—and most chose Chapter 7 rather than Chapter 13. The 2005 bankruptcy law takes this choice away from some filers with higher incomes. One goal of the 2005 law is to force people who could afford to pay back some of their debts over time to file under Chapter 13, rather than allowing them to liquidate their debts outright in Chapter 7. If the U.S. Trustee decides, based on the information about your income, debts, and expenses you provide in your required paperwork, that you could afford a Chapter 13 plan under the new rules, it will file a motion to have your case dismissed. The court is likely to grant that motion and throw out your case unless you convert to a Chapter 13 bankruptcy.
To figure out whether you will be allowed to use Chapter 7, you must first:
• determine your “current monthly income” (actually, your average income in the six months before you file for bankruptcy), and
• compare that figure to the median family income in your state.
If your current monthly income is no more than the state’s median income, your Chapter 7 bankruptcy won’t be presumed to be “an abuse” of the bankruptcy process. However, if your actual income (as shown in Schedule I of your bankruptcy papers, explained in Ch. 6) is significantly higher than your expenses (as listed in Schedule J, also explained in Ch. 6), you might still be forced into Chapter 13. (See In re Pak, 343 B.R. 239 (N.D. Cal. 2006), and In re Paret, 347 B.R. 12 (D. Del. 2006).)
If your current monthly income exceeds the state median income, you will have to do some calculations (called the means test) to determine whether you can afford to pay off at least some of your unsecured debts in a Chapter 13 plan. (If you have to take the means test, you can find step-by-step instructions in Ch. 6.)
Certain Disabled Veterans Can Skip the Math
If you are a disabled veteran, and the debts you wish to discharge were incurred while you were on active duty or engaged in homeland defense activities, the court is legally required to treat you as if your income is less than the state median. This means that you’ll be able to file for Chapter 7 regardless of your income or expenses.
The new law doesn’t clearly indicate what will happen if only some of your debts were incurred while you were on active duty. We’ll have to wait and see how courts interpret this provision.
Determine Your Current Monthly Income
Legally, your current monthly income is your average monthly income over the six months preceding the month in which you filed for bankruptcy. You must include almost all types of income, taxable or not—this means, for example, that if you are including wages in your income, you must use your gross earnings, not the net income you actually take home after taxes are withheld and other deductions are made. For filers who lost jobs or other income during the six-month period before filing for bankruptcy, this current income figure may be significantly more than what they are actually earning each month by the time they file for bankruptcy.
Example: John and Marcia are married and have two young children. They fell quickly into debt after John was forced out of his job because of a work-related injury on April 1, 2012. Three months later, on July 1, 2012, John and Marcia decide to file for bankruptcy.
To compute their current monthly income, Marcia adds up the family’s income for the period from January 1, 2012 through June 30, 2012 (the six-month period before their filing date). This includes John’s gross salary for the first three months (he made $8,000 a month as a software engineer), plus $1,800 in workers’ compensation benefits for each of the last three months. Marcia made $1,000 during each of the first three months and had no income for the last three months. The total family income for the six-month period is $32,400. The family’s current monthly income is $32,400 divided by six, or $5,400, even though the amount they actually took in during each of the three months before filing was only $1,800.
Use the Current Monthly Income Worksheet, below (and in Appendix B), to calculate your current monthly income by:
• adding up all of the income you received during the six-month period before the month in which you filed for bankruptcy, and
• dividing by six to come up with a monthly average.
You should include all of the following types of income on the form:
• wages, salary, tips, bonuses, overtime, and commissions
• gross income from operating a business, profession, or farm
• interest, dividends, and royalties
• rents and other income from real property
• pension and retirement income
• regular contributions someone else makes to your or your dependents’ household expenses, including child or spousal support
• regular contributions of your spouse, if he or she isn’t filing for bankruptcy with you
• unemployment compensation
• workers’ compensation insurance
• state disability insurance
• annuity payments, and
l• ump-sum, windfall payments (such as lottery winnings).
Income You Don’t Have to Include
Your current monthly income includes income from all sources, except:
• income tax refunds
• payments you receive under the Social Security Act (including Social Security retirement benefits, Social Security Disability Insurance, Supplemental Security Income, Temporary Assistance for Needy Families, and possibly state unemployment insurance)
• payments to you as a victim of war crimes or crimes against humanity, and
• payments to you as a victim of international or domestic terrorism.
Determine Your Household Size
The size of your household is very important: The more members you have, the less likely it is that your income will exceed the state median for households of the same size, and the less likely you are to have to take the means test. For example, assume that your current monthly income is $6,000, the median income for a household of three in your state is $5,800, and the median income for a household of four is $6,500. Being able to count that additional person means you won’t have to take the means test.
Unfortunately, neither Congress nor the courts have given clear guidance on how to calculate household size. Most courts adopt the census test for a household, which includes all of the people, related and unrelated, who occupy a house, apartment, group of rooms, or single room that is intended for occupancy as separate living quarters. Under this test, you can count your children or stepchildren even if they are not your dependents for tax purposes.
Domestic partners count as a single household. But mere roommates are not part of the same household if they have separate rooms within a house and don’t act as a single economic unit by mingling their incomes and jointly paying expenses.
One vexing issue yet to be decided is whether children can be counted as part of a household if they are only living with the parent part time under a custody and visitation agreement. If this describes your situation, and being able to count your children as part of your household would mean you don’t have to take the means test, it might make sense to talk to a local bankruptcy attorney and find out how your local court handles this issue. (See Ch. 10 for information on finding a bankruptcy lawyer.)
Compare Your Income to Your State’s Family Median Income
The census bureau publishes annual family median income figures for all 50 states. To compare your current monthly income to the family median income for your state, you’ll need to multiply your current monthly income by 12 (or divide the annual family median income figure by 12). Let’s do it the first way. In John and Marcia’s case, the family’s current monthly income ($5,400) multiplied by 12 would be $64,800.
Current Monthly Income Worksheet