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GENERAL
INFORMATION ON CHAPTER 7 BANKRUPTCY
Chapter 7 of the United States Bankruptcy Code is commonly known
as a liquidating bankruptcy. This information below explores
the pros and cons of 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 Bankruptcy Schedules.
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. 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. Knowing what your “non-exempt”
assets are is one reason why you need a bankruptcy lawyer.
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.
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
of your corporation.
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 reports 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 will not
be able to file another bankruptcy for at least 6 years, and
therefore, they do not 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) should not be that difficult and you can rebuild
your credit, in many time within two (2) years if you work at
it. 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 suggestions for helping you rebuild your credit
should you so desire.
A word about credit cards and cash advances...
Any debt aggregating more than $1,150.00 from any single creditor
for non-essential, "luxury" goods, or cash advances
totaling over $1,150.00 on a credit card, incurred or taken
within 60 days prior to filing the bankruptcy, are presumed
to be non dischargeable.
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 60
day period prior to filing (actually, it is 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 will not be able to discharge that debt. What it basically
does is shift the burden of proving that the debt should or
should not 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 did not ever have the money
to pay the loans. Forbearances may be sufficient.
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. We may be able
to assist you in accomplishing this. 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, please e-mail me and I will
be happy to forward you a copy of that section.
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 and Pension Plans
Whether or not you can exempt amounts held in a retirement account
depends on numerous factors. 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 (“IRA”)
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 and Judgments 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
analyses to deal with here, but if you have liens against your
property, make sure to discuss this with your attorney.
Types of liens you may be able to get rid of include judgment
liens recorded against your home or specific personal property.
This may also be done under state law after your bankruptcy
is completed.
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, 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 Chapter 13.
So why do you need an attorney?
Some petition preparer 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.
Bankruptcy petition prepares 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 they 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 did not 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 petition
preparers handle things). Further, if you list things incorrectly
in your petition, or omit necessary items, it is YOUR problem,
not the petition preparers'. 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
did not 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.
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. Do not
skimp and save at this point. Hire the most competent attorney
that you can afford and take the first step towards your fresh
start.
What you need for a bankruptcy consultation...
A consultation is the first step in determining whether bankruptcy
is the best solution for your financial problems. In order for
me to accurately assess your situation, I need as much relevant
information as possible. Therefore, I have set up this page
to assist you in preparing for the initial consultation with
me.
Free consultations are only given for potential clients. Thus,
they are limited to debtors who live in New Jersey (or have
lived in New Jersey for the greater part of the last 6 months
than they have lived anywhere else) or to creditors who are
owed money by a debtor who filed bankruptcy in New Jersey. The
same applies for those in the New York City area.
If you are a debtor*, you will need to have the following
information ready to discuss (Please Note: "ready to
discuss" does not mean that you must have all this information
written down and sent to me, although you can if it helps
you):
1. The amounts and types of each of your debts (i.e., credit
card, loans, whether the debts are secured or unsecured, taxes,
employee wages, etc.) and the status and history of your payments
on each (when you last made a payment, are you current, etc.)
2. When you last incurred any of the above debt (for credit
cards, I particularly need to know what purchases, cash advances,
or balance transfers have been made in the last 6 months on
each card).
3. The value of each of your major assets. An asset is anything
that you own, have a right to own, or have an interest in.
It includes the obvious such as household items, cars, real
estate, stocks, money in bank accounts, etc. as well as retirement
accounts, insurance, your interest as a beneficiary in someone's
will, interests in businesses (corporations or partnerships),
etc.
4. If you own real estate, I need to know for each property:
A. It's current fair market value; and B. The amount of each
mortgage, lien, or encumbrance against it; and C. when the
property was purchased. If you received rental income, I will
need information on rents received.
5. Your estimated monthly income and expenses. These two items
are not mandatory for the initial consultation, but are critical
in my making an accurate determination of your best course
of action as well as what bankruptcy chapters you will be
eligible for.
If you are a creditor*:
Please just have as much information as you can about the bankruptcy
case you are calling about (such as the Chapter filed, case
number, copies of the petition and schedules, notices, etc.).
*(A debtor is someone who OWES money and is seeking to get rid
of the obligation to pay in bankruptcy. A creditor is someone
who is owed money by a debtor.)
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