Chapter 7 Bankruptcy

Often referred to as a STRAIGHT BANKRUPTCY, Chapter 7 refers to a section of the United States Bankruptcy Code that deals with debt elimination and liquidation. Depending on your individual situation, you may be able to protect all of your assets including, but not limited to, your home and personal property up to a certain dollar amount depending on the property and circumstances. Once your case is filed with the court, a “Trustee in Bankruptcy” is appointed. The Trustee then gathers and sells any non-exempt property and uses the proceeds from the sale to pay creditors. Most Chapter 7 bankruptcies are “no-asset” cases. The debtor will receive a discharge which releases the debtor from all dischargeable debts and orders the creditors to forever stop their attempts to collect those debts discharged. Once a debt is discharged, the individual is forever relieved of the obligation to pay that debt. Certain debts are not dischargeable; these include most taxes, alimony, child support, student loans, criminal restitution, debts not listed in the Chapter 7 petition, debts incurred as a result of defrauding or misleading a creditor, and an intentional tort.

There has been a considerable tightening of bankruptcy laws over the last few years making it more difficult for some individuals to file Chapter 7. Much has to do with what the code refers to as “means testing.” The results of the new laws are that more individuals will have to file Chapter 13 instead of Chapter 7. Do not despair, the majority of bankruptcy filers qualify for Chapter 7, albeit with a little extra effort. 

Eligibility for Chapter 7

Filing a Chapter 7 bankruptcy under BAPCPA requires the filer to undergo a “means test” to qualify (see means test). Essentially your income and expenses are reviewed to determine how they compare to standards established for your area as determined by the Internal Revenue Service (IRS).

For clarification, when your income is less than the median income for you or your family, you qualify for Chapter 7. When your income from the previous six months is greater than the median income and you are able to pay at least $6,000 over the next five years towards your debt, you cannot file Chapter 7 but instead must file Chapter 13.

Further, means testing requires you to pay any overdue tax returns within weeks of filing bankruptcy. You must also pay for credit counseling and budget analysis at your own expense.

Means Testing

To determine if you are eligible for a Chapter 7 bankruptcy, Federal bankruptcy laws provide for a “means test.” The test is a limiting test to determine those people who cannot repay their debts. If your income is below the median income for families in your state, you will be eligible. The income limits are based on Census Bureau statistics.

If you do not qualify for a Chapter 7 bankruptcy, you may qualify for a Chapter 13 bankruptcy. When you make more than the median income for your state, the court must determine whether your disposable income will cover your debts. Certain expenses, like your mortgage and car payments, are deducted from the average income allowance to determine disposable income. The amount is then multiplied by 60 to determine the amount you could pay over the next five years (60 months).

Filing a Chapter 7

The Chapter 7 bankruptcy is initiated by filing a petition along with a detailed and lengthy “Statement of Financial Affairs.” This statement has extensive schedules and requires detailed lists of all debts, as follows:

• Priority debts (includes taxes)
• Secured debts that have property as collateral, such as home mortgages and auto loans,
• Unsecured debt of any nature

Additionally the Statement of Financial Affairs must include:

• Names and addresses of all creditors
• All assets, including personal property and real property

The Statement of Financial Affairs must be accurately and completely prepared. Any debts not listed will not be discharged. A failure to list assets may result in denial of discharge or charges of bankruptcy fraud.

341 Hearing

Once the petition for bankruptcy is filed you must appear at the “first meeting of creditors,” this is referred to as a “341 meeting”. The Trustee in Bankruptcy may ask you questions under oath about your property and debts. Creditors may also question you on your property and debts, but rarely do.

Your responsibility following the 341 meeting is to provide the Trustee with any requested information and generally to cooperate in the process.

A creditor has up to 60 days following the 341 meeting to persuade the court that you should not be allowed to discharge your debts.

Exempt Property

Certain property is exempt from bankruptcy; many states allow you to use the state’s determination of exempt property or the federal list of exempt property. There are a few states that require you use the state’s list. Generally, the federal list includes:

• Real estate, such as your residence
• Trade or professional books and tools
• Unmatured life insurance contracts
• Prescription health aids
• Social security, veteran’s benefits, disability, illness, or unemployment benefits
• Proceeds from a judgment

The majority of Chapter 7 cases are “no-asset” cases. This means that you do not have any nonexempt property for the Trustee to sell. You must declare when filing your bankruptcy petition if it is “asset” or “no-asset.” The trustee in bankruptcy then has the burden to change the designation depending on circumstances.

Bankruptcy in Washington State

In certain states you have the option of using either the federal exemption amounts or the state exemption amounts. In Washington State, the Revised Code of Washington (RCW) exemption statutes allow you to keep the following (all citations refer to the RCW):

While all efforts are made to keep the following exemption statutes current, please do not rely upon them, as laws change frequently. Only a licensed attorney can advise you of the current law and its applicability to your particular situation.

Homestead Exemptions

6.13.010 - Real property or mobile home up to $125,000. If property is unimproved but intended to be occupied at time of filing bankruptcy up to $15,000. Before sale of home, if the property is unoccupied or unimproved, a homestead declaration must be filed (6.15.040)

Personal Property Exemptions

6.15.010 - Motor vehicle up to $2,500 if single or 2 vehicles up to $5,000 if community; clothing, but furs, jewelry & ornaments limited to $1,000; household goods, furniture, appliances, home and yard equipment up to $2,700 ($5,400 for husband and wife); pictures and keepsakes; private libraries up to $1,500; food and fuel for comfortable maintenance; tuition units that were purchased more than 2 years prior; prescribed health aids; $2,000 of any other personal property, but not more than $200 of it in cash, bank deposits, stocks, bonds, or other securities; and personal injury awards up to $16,150.

6.15.030 - Fire insurance for lost, stolen or destroyed exempt property.

68.20.120 - Burial plots if sold by a nonprofit cemetery association.

68.24.220 - Burial plot.

Wages Exemptions

6.27.150 - The greater of the following: 30 times the federal hourly minimum wage or minimum of 75% of disposable earnings. Judge may approve more for low income debtor.

Pensions Exemptions

11 U.S.C. § 522 - Tax exempt retirement accounts; Traditional and Roth IRAs up to $1,095,000 per person.

2.10.180 - Judges.

6.15.020 - ERISA-qualified benefits, including IRAs and Keoghs.

41.24.240 - Volunteer firefighters.

41.26.053 - Law enforcement officials and firefighters.

41.28.200 - City employees.

41.32.052 - Teachers.

41.40.050 - Public employees and state employees.

43.43.310 - State patrol officers.

Public Benefits Exemptions

7.68.070 - Crime victims' compensation.

50.40.020 - Unemployment compensation.

51.32.040 - Industrial insurance (workers' compensation).

74.04.280 - General assistance.

74.08.210 - Old-age assistance.

74.13.070 - Child welfare.

Tools of Trade Exemptions

6.15.010 - Tools and materials used in any trade up to $5,000; library, office furniture, equipment and supplies of a physician, surgeon, attorney, clergyman or other professional up to $5,000; farm trucks, tools, equipment, supplies, stock and seed of a farmer up to $5,000. .

Alimony and Child Support Exemption

6.15.010 - Child support payments.

Insurance Exemptions

48.36A.180 - Disability benefits, proceeds, dividends, interest, loan, cash, or surrender value.

48.18.410 - Life insurance proceeds, dividends, interest, loan, cash, or surrender value if the insured is not the beneficiary.

46.18.420 - Group life insurance policy or proceeds.

46.18.430 - Annuity contract proceeds up to $2,500 per month.

48.18.400 - Fraternal benefit society benefits.

Other - You may use the following exemptions only if you choose the Washington State exemptions. You may not use these if you choose to use the Federal Bankruptcy Exemptions:

Retirement Benefits

5 USC. §8346 - Civil Service employees

22 USC. §4060 - Foreign service employees

10 USC. §1440 - Military service employees

45 USC.§.231m - Railroad workers

42 USC. §407 - Social Security benefits

38 USC.§3101 - Veteran's benefits

Survivor's Benefits

10 USC. §1450 - Military service.

28 USC. §376 - Judges, U.S. court directors, judicial center directors, and U.S. Supreme Court Chief Justice's administrative assistants.

33 USC. §775 - Lighthouse workers

Death and Disability Benefits

5 USC. §8130 - U.S. Government employees

33 USC. §916 - Longshoremen, harbor workers

42 USC. §1717 - Military service

Misc.

10 USC. §1035 - Military deposits to savings accounts (while on permanent duty outside the U.S.).

15 USC. §1673 - 75% of earned but unpaid wages or 30 times the federal minimum hourly wage; the greater of these two. (Judge may approve more)

25 USC. §410 - Indian lands or homestead sales or lease proceeds.

25 USC. §543 & 545 - Klamath Indians tribe benefits

38 USC. §1970(g) - Military group life insurance

45 USC. §352(e) - Railroad workers' unemployment

46 USC. §11110 - Seamen's clothing

46 USC. §11109 - Seamen's wages (while on a voyage and pursuant to a written contract)

Reaffirming Debts

Reaffirming a debt is when you desire to keep a certain debt that has been included in the bankruptcy. When you decide to reaffirm a debt, such as an auto loan, you are required to file an agreement with the court and disclose the following information:

• Your income and expenses so that the bankruptcy Trustee can determine there is adequate money to pay the reaffirmed debt,
• Evidence that you have been adequately advised of the amount of the debt you are reaffirming,
• The method that was used to calculate the debt, and
• That you are aware that the debt will not be discharged in the bankruptcy.

When you are represented by an attorney, the attorney must certify in writing that they have advised you of the legal consequences of the agreement, you were fully informed and entered the agreement voluntarily, and that the reaffirmed debt will not cause an undue hardship on you or your family.

If you are not represented by an attorney, the court must approve the reaffirmation agreement. In the event the court disapproves your agreement you are entitled to a hearing on the matter.

Discharge

Absent any creditors attempting to get money from you and the trustee, your debts that existed before the filing date will be “discharged” or cancelled within 60 days of the 341 meeting.