Chapter 7 – Straight Bankruptcy

The principal purpose of the Bankruptcy Code is to grant a “fresh start to the honest but unfortunate debtor.”— United States Supreme Court

If you want to…

• Stop your creditors from harassing you;
• Get rid of your credit card or medical bills;
• Stop a collection lawsuit;
• Stop a wage garnishment;
• Stop a tax-refund garnishment;
• Stop a bank garnishment (and possibly get your money back);
• Stop your creditors from taking your assets or filing judgment liens against your property;
• Discharge your debts;
• Walk away from distressed real estate —

then a Chapter 7 may be for you.

What Is a “Chapter 7”?

A Chapter 7, also known as a “liquidation” or “straight bankruptcy,” is a bankruptcy case that allows you to walk away from and avoid paying many (if not most) of your unsecured, unmanageable debts — including credit cards and medical bills — without fear that your creditors will later come after you to collect. In some cases, you can even discharge taxes that you owe to the IRS or the State of Michigan.

How Will a Chapter 7 Help?

A Chapter 7 can help you in many situations. For example:

• Stop your creditors from harassing you. The biggest benefit of any bankruptcy is the protection of the “automatic stay.” The moment you file a Chapter 7 petition, all of your creditors must immediately stop trying to collect from you — even if they don't yet know you filed. Collection calls and threats must stop, and no one can sue you or continue a civil lawsuit against you. If a creditor ignores the bankruptcy stay, you can even sue them and collect money from them.
• Stop lawsuits and garnishments. As soon as you file, all court cases and garnishments against you must stop. If a creditor garnished your wages or bank account within a certain period before filing, the creditor may have to return the money to you.
• Stop repossession and get your property back. If a collector seized your car or other property and you file a Chapter 7 within a certain period, the creditor may have to return the seized property to you.
• Stop creditors, including the IRS, from filing liens against your property. As soon as you file, your creditors are forbidden from filing a lien — including tax liens filed by the IRS or the State of Michigan. Timing is very important, because once liens are filed the debts become secured and, in many instances, are no longer dischargeable.
• Discharge your unsecured debts. Upon successful completion of a Chapter 7 (which usually takes three to four months), unsecured debts such as credit cards, medical bills, and past-due utility payments are discharged. You can walk away from them and never worry about them again.
• Discharge “old” income taxes. If you owe income taxes from more than three years ago, the IRS assessed the debt at least 240 days ago, and no tax lien has been filed, you may be able to discharge those taxes in a Chapter 7 — as long as you did not commit fraud or attempt to evade payment and you actually filed your return at least two years ago. (If a tax lien was filed, a Chapter 7 may allow you to legally avoid paying the income tax until you sell or remortgage the property.) Timing is important.

Other Advantages of a Chapter 7

• Automatic stay protection — described above, the single biggest benefit of filing.
• No tax consequences. Unlike a “debt settlement” or “debt negotiation” — where you settle for less than owed and then have to pay income tax on the “charged off” amount (after the creditor sends a Form 1099) — you cannot be charged income tax on a debt that was discharged in bankruptcy.
• Flexibility with mortgage debt. If, after receiving a Chapter 7 discharge of your mortgage debt, you choose to keep making payments voluntarily, you will still have the option to stop making payments and surrender the property later — without tax liability or the possibility of a deficiency judgment.

Do I Qualify for a Chapter 7?

To be eligible for a Chapter 7, you must first pass the “means test” — a formula that compares your average gross household income for the past six months (including household members who are not filing, but not including Social Security) against the median income for Michigan households of the same size. The means test was designed by Congress to keep higher-income people who could afford to pay their creditors from filing a Chapter 7.

If your gross household income (after certain allowed deductions) is less than the Michigan median for your household size, and:

• you have not received a Chapter 7 discharge in the past eight years; and
• you did not have a previous bankruptcy case dismissed within 180 days for failing to comply with court orders or after your creditors sought relief to recover liened property —

then you are likely eligible to file a Chapter 7. (If you do not pass the means test, you can still file a Chapter 13.) Additionally, before filing you must take an approved credit-counseling course, which can be done online or by phone in about an hour from the comfort of your home.

Will I Be Able to Keep My Assets?

In most cases, a person who files a Chapter 7 will be allowed to keep their property. Section 541 of the Bankruptcy Code provides that, as soon as you file, all of your property becomes part of the “bankruptcy estate.” Think of the estate as a giant container holding all of your property. An individual debtor is then able to remove certain “exempt” items — such as personal clothing and household goods, some equity in a house or vehicle, and retirement savings like a 401(k) or pension. In many cases an individual debtor can exempt all of his or her assets in what is called a “no-asset case.” Any remaining non-exempt assets can be sold by the Chapter 7 Trustee, with the proceeds used to pay creditors.

This means that before filing a Chapter 7, you must have a meaningful conversation with your bankruptcy attorney and go over what property you own so you don't lose it. (If you have non-exempt assets, you can still file a Chapter 13 and keep your property.)

What Else Should I Consider Before Filing?

Another consideration is whether you repaid any money to friends or relatives within the “preference period” before filing. To ensure similarly situated creditors get equal treatment, the Code allows a Chapter 7 Trustee to recover payments to ordinary creditors made within 90 days before filing, and payments to “insiders” (such as friends and relatives) made within one to two years before filing. These are called “preferences.”

In other words, if you repaid a friend or relative and then file a Chapter 7 within the preference period, the Trustee can (and likely will) sue that person to recover the money. That's why, before we file any Chapter 7 case, we sit down with you to go over your complete financial picture to make sure there are no hidden traps. (If you need to file right away and are concerned about preferences, you can always file a Chapter 13.)

Are There Any Disadvantages?

There may be a couple of short-term disadvantages. First, a bankruptcy will be listed in the “public records” section of your credit report for ten years after you file. After receiving your discharge, you will have to work to repair your credit — though in many cases it is easier to rebuild after a Chapter 7, because your other delinquencies will drop off and your debt-to-income ratio improves. Second, you probably won't be able to obtain credit immediately after discharge. However, because the law does not allow another discharge for eight years, some companies will be willing to extend small lines of credit while you rebuild.

What Do I Need to Do?

If you want to take advantage of the benefits of a Chapter 7, call our office at 248-417-9800 or contact us online to set up an appointment for a free, no-obligation, confidential consultation. Waiting will not make the problem go away — it will only make it worse. Our phone lines are available 24 hours a day.

Pursuant to 11 U.S.C. § 528 we are required to state that bankruptcy relief is provided in accordance with Title 11 of the United States Code. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.