CHAPTER 7 BANKRUPTCY

Chapter 7 of the United States Bankruptcy Code is commonly known as a liquidating bankruptcy, or just plain *bankruptcy*. This page explores the benefits and downsides to filing a Chapter 7, including what types of debts you can usually discharge (get rid of) and other frequently asked questions.

Under any Chapter, you are required to list all of your assets and all of your debts on your petition.

An asset is anything you own or may have a right to own at some future date (for example, if you are in someone's will). Some (and in many cases, all) of your assets will be exempt. California law provides two separate sets of exemptions from which to choose. A detailed analysis of these exemptions is not possible here. Basically, you can exempt any items normally used for your support and maintenance, such as clothing, furniture, household goods, and so forth. After you file your case, a Trustee is appointed. He (or she) will liquidate (sell) all of your non-exempt assets and pay your creditors according to the priority afforded to them by the Bankruptcy Code. You may voluntarily repay any debt upon agreement with the creditor. Whether this is ever advisable is questionable and is an issue to be discussed with your attorney.

SHOULD YOU FILE CHAPTER 7?

The goal of most any personal bankruptcy is to discharge your existing debts and allow you a *fresh start* on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. Your creditors are entitled to share in the proceeds obtained from the liquidation of your non-exempt assets. Under Chapter 7, the amount your creditors will get is fixed by the value of your non-exempt assets.

Certain debts are non-dischargeable in a Chapter 7. Examples of these are taxes less than three (3) years old, student loans (with the sole exception listed below), child support and alimony, and any debts procured by fraud (fraud debts may be dischargeable in a Chapter 13), incurring debt without a reasonably certain ability to repay the debt, and so forth.

Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters. Generally, Chapter 7 is the cheapest, quickest and least painful of the three major Chapters (the others being 11 and 13). Costs and fees vary depending on the number of creditors you have, complexity of your case, and other factors. Want a free phone consultation?

If you are an individual, and meet the requirements, Chapter 7 allows you to discharge most or all of your debts. It allows you to do this regardless of how many assets you have or how much your creditors ultimately receive. It basically allows you to walk away from your debts and start over.

Corporations do not receive discharges of debts, but there still may be some benefit to allowing a trustee to liquidate the assets.

WHAT ARE SOME OF THE DISADVANTAGES?

You are only able to receive a discharge after six years have passed since the commencement of the last case in which you received a discharge. Thus, you should not file a bankruptcy if you need the option of doing it again in the next six years.

If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 petition. Only under extraordinary circumstances will the Trustee operate a business.

WHAT ABOUT YOUR CREDIT?
The bankruptcy will appear on your credit report for up to ten (10) years after you file. Other accurate negative reports on your credit must be removed after seven (7) years (like late payments on credit cards, foreclosures, etc). However, according to my former clients, this is usually not as big a problem as most people think. Credit lending agencies know you won't be able to file another bankruptcy for at least 6 years, and therefore, they don't have that risk to bear. You will not get as high a credit limit as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn't be that difficult and you can rebuild your credit over time. What you will likely face is higher interest rates, required higher down payments, more points, etc. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc. In any event, I can provide you with excellent materials for helping you rebuild your credit should you so desire.

A WORD ABOUT CREDIT CARDS AND CASH ADVANCES
Any debt aggregating more than $1,075.00 from any single creditor for non-essential,"luxury" goods, or cash advances totaling over $1,075.00 on a credit card, incurred or taken within 60 days prior to filing the bankruptcy, are presumed to be nondischargeable. The obvious reason for this is to discourage would-be debtors from "running up" their credit charges, then filing bankruptcy. To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it's best not to use them at all). It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy. You should consult with your attorney about your personal situation. This particular provision is just a presumption of nondischargeability. It does not mean that if you wait more than 60 days you are magically free from nondischargeability issues; nor does it mean that if you file the bankruptcy within the 60 days that you won't be able to discharge that debt. What it basically does is shift the burden of proving that the debt should or shouldn't be discharged onto the debtor during that 60 day period (rather than on the creditor where it would otherwise be).

DISCHARGING STUDENT LOANS
As of October 7, 1998, Student Loans are only dischargeable if 1. You can prove that having to repay it would impose an "undue hardship" on you (this is very rarely granted by courts and the burden of proof is substantial), OR, 2. If the PROGRAM under which your student loan is issued, insured, administered is a FOR-profit, PRIVATE (non-government) entity, it may be dischargeable. (If the program itself, such as LAL, GSL, etc. receives nonprofit funding by participation of nonprofit entities, the loan is not dischargeable in bankruptcy). To prove undue hardship one basically has to show the following:

1. that you cannot maintain, based on current income and expenses, a 'minimal' standard of living for yourself and your dependents if forced to repay the loans;

2. that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and,

3. that you made good faith effort to repay the loans, for example, by past payments for several years, etc. Making payments is not always required if you didn't ever have the money to pay the loans. Forebearances may be sufficient.

HEAL Loans are subject to an even higher standard of scrutiny and are even harder to discharge.

Click here to see how the 9th Circuit court has interpreted the above requirements in a couple of different recent cases.

Please note that these are merely representative cases and are not necessarily binding on your circumstances.

To see a case explaining the non-profit/for-profit distinction for dischargability of privately issued student loans, see In re Pilcher,149 B.R. 595 (9th Cir. BAP 1993).

It appears that the proposed new bankruptcy laws will make even the undue hardship discharge disappear, so if you believe you meet the above requirements, you need to pursue it quickly.

DISCHARGING TAXES AND REMOVING TAX LIENS Certain types of tax obligations, such as income taxes, may be discharged under specific circumstances. Many required factors must be met before any tax can be discharged under Chapter 7 or Chapter 13. In Chapter 7, the minimum requirements for discharging federal or state income taxes are: (1) it has been over 3 years since the returns were last DUE (including extensions), (2) the returns were timely filed or it has been at least 2 years since the returns were filed, (3) there was no fraud involved or attempts to evade the tax, AND, (4) the taxes were not assessed within the last 240 days.

If it has been over 3 years since your returns were last due and they have not been assessed in the last 240 days, BUT you have not yet filed the returns or there was some kind of fraud involved in filing them, then they may be dischargeable in a Chapter 13. Again, discharging taxes is an extremely complicated area, and you should definitely consult with a knowledgeable attorney before deciding whether to file based on dischargeability of your taxes and before you take any further steps with your taxes (such as filing past due returns) Sometimes filing a late return can work against you as far as being able to discharge those taxes in a Ch. 13, so definitely speak to an attorney before doing anything.

Tax Liens that have already been recorded against your property may also be removed under certain circumstances. Your attorney may be able to assist you in accomplishing that nifty feat! Generally, liens that have attached to specific property will survive a bankruptcy. What does that mean? It means that the lien will stay against your property regardless of your discharge of the underlying debt. So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you have the lien removed.

CAN YOU BE DENIED A STUDENT LOAN BECAUSE YOU OR YOUR PARENTS FILE BANKRUPTCY? Section 525 of the Bankruptcy Code prohibits discriminatory treatment by any governmental or other student loan program on the basis of filing a bankruptcy. In other words, a student loan agency cannot deny your loan application based on the filing, by you or anyone you know, of a bankruptcy. If you would like to read Section 525 for yourself, click here!

CAN YOU BE FIRED OR DENIED EMPLOYMENT BECAUSE OF A BANKRUPTCY?
No. While an employer can usually find some reason to fire anyone, they cannot use bankruptcy as a basis for doing so. Again, this is set forth in Section 525 of the Bankruptcy Code. (See above)

RETIREMENT ACCOUNTS AND PENSION PLANS
Whether or not you can exempt amounts held in a retirment account depends on numerous factors, including which set of exemptions you choose to use (you need to discuss this with your attorney--in California, there are two sets of exemptions). According to the United States Supreme Court, if your retirement plan is ERISA approved, meaning that it contains a trust "anti-alienation" provision making it impossible to transfer or withdraw the funds prematurely, it is automatically exempt. Individual Retirement Accounts may be exempted only up to the amount reasonably necessary for the debtor's support and maintenance, taking into account all other anticipated and existing sources of income and expenses. Obviously, exempting retirement funds is very tricky and requires the expertise of an experienced bankruptcy attorney.

GETTING RID OF OTHER LIENS, ABSTRACTS OF JUDGMENT, AND TRUST DEEDS RECORDED AGAINST YOUR PROPERTY

The bankruptcy code enables a broad range of powers which can enable you to avoid liens that were placed against your personal property or real property (like a house). It is too complicated an analysis to deal with here, but if you have liens against your property, make sure to discuss this with your attorney.

T ypes of liens you may be able to get rid of include judgment liens recorded against your home or specific personal property. Also, in a Chapter 13 junior trust deeds against your home may be able to be removed under certain specific circumstances. This is not an option in a Chapter 7, so make sure to check out the Chapter 13 page and consult with an attorney.

DISCHARGING FRAUD JUDGMENTS OR DEBTS WHERE FRAUD MAY HAVE BEEN INVOLVED

Debts that you incurred which were the result of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud. However, the news isn't all bad. These types of debts may be discharged in a Chapter 13.

PAYING YOUR TAXES WITH YOUR CREDIT CARD

Debts incurred on your credit cards to pay taxes to the IRS will NOT be dischargeable in chapter 7 but may be dischargeable under Ch. 13.

SO WHY DO YOU NEED AN ATTORNEY?
Some paralegal services charge a minimal fee to prepare and file the necessary paperwork to file a bankruptcy. While in some cases this may not be a major problem, it has been my personal experience that the risk is simply not worth it.

Much of what goes into the bankruptcy petition comes from insightful and probing questioning from a qualified bankruptcy attorney. Paralegals and other "bankruptcy petition preparers" are strictly prohibited from practicing law and, therefore, cannot give legal advice or ask the necessary questions to make sure you are completing your paperwork fully and completely. Even if the were legally allowed to do so, they are not able to adequately assess the laws surrounding exemptions and to determine what your best options are. You also may be assuming there is no problem with listing a particular asset, or reaffirming a particular debt, only to find out months or even years from now, that because you filed the bankruptcy or didn't take appropriate steps, that you did not get rid of that debt, or that you may lose an asset, or any number of other problems.

Perhaps most importantly, they also cannot represent you in court if the need should arise (and it often does when paralegal's handle things). Further, if you list things incorrectly in your petition, or omit necessary items, it is YOUR problem, not the paralegal's. You sign all your bankruptcy papers under penalty of perjury. Many times I have watched a bankruptcy debtor in front of a judge, facing the complete denial of their discharge, pleading with the judge to help them because they didn't have an attorney representing them. Ultimately, the debtor may have to spend several thousand dollars to attempt to remedy a situation that could have been prevented, or at least planned for, at the beginning.

A PRIME EXAMPLE:

I just got a call today from a lady who had filed a Chapter 7 through a paralegal. After the Trustee reviewed her papers he noticed that her automobile had some $10,000 of equity available which she had failed to exempt. Therefore, he is seeking to sell the car. She then had the paralegal prepare some sort of Motion to Dismiss the case (which I can almost assure will NOT be granted) so that she can keep her car and work out payment arrangements with her creditors. My advice was that she should have filed a Chapter 13 to begin with (considering all her assets) but unfortunately, the paralegal had her artificially increase her expenses to show that she has no disposable income to fund a Chapter 13 plan (see information on Chapter 13). Therefore, in order to succeed in a Chapter 13 and make payments she would basically have to admit to perjury on her original schedules filed with her bankruptcy. The bottom line is that she is likely going to lose her car. There are, I'm sure, other problems in her case that haven't even surfaced yet, but this is a prime example of the problems I hear about almost daily with people that don't do things correctly at the beginning. And now, it's simply too late; there was nothing I could do for her at this point. The horribly bad advice and pre-planning done by the paralegal has left her with no viable options. So she saved a few hundred dollars by using the paralegal and now risks losing a car worth $19,000 or perhaps worse, losing her whole bankruptcy discharge (meaning the creditors who were garnishing her wages before she filed will be able to reinstate the garnishment).

Enough said?

Bankruptcy is a very important decision. It is basically the first step towards your entire financial future. The entire bankruptcy system is designed so that attorneys represent all parties involved. That is what we are trained to do. Do you want to trust this future to a non-licensed non-professional?

This is the time that you should do things correctly. Don't skimp and save at this point. Hire the most competent attorney that you can afford and take the first step towards your fresh start.

**For more detailed, "official" information from the U.S. Trustee's Office, click here !

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For a consultation, click here

NOTE: Given the nature of the law, it is extremely difficult to accurately and adequately answer questions posed in an e-mail message. It is much better to call me and allow me to ask pertinent questions that will help lead to the best answer and to best assess your personal situation. "Simple" questions, of course, can be answered by e-mail. You must indicate in your e-mail the city and state where you are living or, if you are a creditor, where the bankruptcy case was filed.