CHAPTER 7 BANKRUPTCY OVERVIEW

A Chapter 7 bankruptcy is the most common type of bankruptcy that is filed under the Federal Bankruptcy Code.  Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy.  This description creates a common misconception.  Some people think that they will lose all of their property if they file a Chapter 7 case.  This is often incorrect, because most people are able to keep most, if not all of their property, in Chapter 7 cases.  It is very important to speak with Justin M. Myers, your Utah bankruptcy attorney to learn about the Chapter 7 option.

With several exceptions, people in Chapter 7 bankruptcy are able to eliminate most of their debts.  In Chapter 7 cases, people can usually eliminate all of their credit card debt, medical bills, signature loans, personal loans, unsecured lines of credit, pay day loans, and deficiency balances on repossessed vehicles and foreclosed homes.  Debts that are typically not dischargeable (meaning they will not be eliminated in a bankruptcy) include child support, alimony, criminal fines and civil fines.  Taxes and student loans are dischargeable under certain limited circumstances, but the general rule is that these debts will not be discharged and that they will survive a Chapter 7 bankruptcy.

Upon filing of a Chapter 7 Utah bankruptcy, creditors are required to immediately stop all collection activities.  This means that creditors must stop sending collection letters and calling on the phone.  This also means that creditors must stop all garnishments and halt all lawsuits.

A Chapter 7 Utah bankruptcy will generally stop foreclosure sales and repossessions from proceeding if the case is filed before these events occur.  However, since these debts are secured by homes or vehicles, a Chapter 7 Utah bankruptcy filing usually only stops foreclosure sales and repossessions temporarily (generally only for a few weeks or months).  Usually, if the person who files the Chapter 7 Utah bankruptcy does not get caught up on payments with the mortgage company or the vehicle financing company, these creditors will file a motion with the bankruptcy court asking the Judge to grant them permission to proceed with the foreclosure or the repossession.

In a Chapter 7 case, if the debtor feels overwhelmed with a secured debt payment (such as a vehicle payment or a house payment) the debtor can surrender the property back to the bank holding the loan.  A lending bank then only has the right to take the property back (the home or the vehicle) and after foreclosure or repossession the bank cannot sue the debtor for any short fall or deficiency.

In a Chapter 7 Utah bankruptcy, there is a Chapter 7 trustee assigned to each case.  The Chapter 7 trustee’s primary job is to try to find money that the Trustee can distribute to the creditors in the case. To accomplish this objective, the trustee also looks for assets that the trustee can take and liquidate, or sell.  The trustee uses whatever money is collected to pay the debtor’s creditors.

Most people worry about losing all of their property when they file a Chapter 7 case.  The reality is that most Chapter 7 bankruptcy filers end up keeping their property and the Chapter 7 trustee ends up taking little or nothing from them.  Utah state exemption laws allow people who file Chapter 7 cases to claim certain exemptions in their property.  Valid exempt property cannot be taken from a person who files a bankruptcy.   This means that most people who file Chapter 7 cases in Utah are allowed to keep their vehicles, homes, and their household furnishings and possessions.  It is important to speak with a Utah bankruptcy attorney to determine what property is exempt and what property the trustee may be entitled to take.

Procedurally, the instant a Chapter 7 case is filed, creditors must stop all collection efforts immediately.  Approximately two weeks after the case is filed, the bankruptcy court mails notice of the case filing to all of the debtor’s creditors.  About a month after the case is filed, the debtor will have a meeting with the trustee.  This meeting is called a “341 Meeting” or the “Meeting of Creditors.”  Your Utah bankruptcy attorney can discuss this meeting with you in greater detail This meeting is open to the public and all of the debtor’s creditors are invited to attend.  Most creditors do not attend this meeting and usually the only people in attendance are the person who filed the bankruptcy, the debtor’s attorney and the Chapter 7 trustee.

In Utah there are usually six to eight 341 Meetings scheduled per hour.  This meeting provides the trustee an opportunity to question the person who filed the case about the person’s debts and assets.  This meeting usually only lasts about five to ten minutes.  Typically if the trustee takes no property from the debtor, about sixty days following this meeting the debtor will receive a discharge and the case will be closed.  The trustee has the right to keep the case open longer if the trustee finds assets to take or wants to investigate the case further.  Most cases are closed and discharged within three to four months after they are initially filed.

MEDIAN INCOME REQUIREMENTS FOR FILING CHAPTER 7

In order to qualify for a Chapter 7 bankruptcy filing in Utah, a person’s income must be less than Utah’s median income based on the debtor’s household size.   These numbers vary from year to year.  For example, the median income for Utah bankruptcy cases filed after May 1, 2012, are as follows:

  • Family of one:  $49,697;
  • Family of two:  $57,309;
  • Family of three:  $61,508;
  • Family of four:  $66,825;

For each additional household member in excess of four add $7,500.

If a debtor’s household income exceeds the applicable median income, the debtor still may qualify to file a Chapter 7.  In order to qualify, the debtor will need to take a “Means Test” to see if the debtor is eligible to file a Chapter 7.  The “Means Test” looks at the debtor’s average income for the past six months and then allows the debtor to deduct certain expenses.   If  a debtor’s allowed expenses exceed their average gross monthly income, then the debtor may qualify to file a Chapter 7 case.

IF I HAVE FILED BANKRUPTCY BEFORE HOW LONG DO I NEED TO WAIT TO FILE AGAIN?

If the debtor has filed a prior Chapter 7 bankruptcy and received a discharge in that case, the debtor needs to wait eight years before filing another Chapter 7 case again.  If the debtor filed a prior Chapter 13 bankruptcy and received a discharge in that case, the debtor will need to wait at least 6 years before filing a Chapter 7 case unless in the prior Chapter 13 case (1) the debtor paid all “allowed unsecured” claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort.  The waiting period between each case is measured from the initial filing date in the first case to the filing date in the second case.

 

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Justin M. Myers

Justin M. Myers Attorney-At-Law, LLC

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