Chapter 7 – Straight Bankruptcy

Get Rid Of Your Debts And Get The Fresh Start That You Deserve

“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 is 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 to collect it.  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 will help you in many situations.  For example, you can=

  • Stop Your Creditors From Harassing You – The biggest benefit of any bankruptcy is the protection that you get from the “automatic stay”. This means that at 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 that you filed.  This means that the collection calls and threats have to stop and that no one can sue you or continue a civil lawsuit against you.  If any of creditors ignore the bankruptcy stay, you can even sue them and collect money from them.
  • Stop lawsuits and garnishments – As soon as you file bankruptcy all court cases and garnishments against you must stop and, if a creditor has garnished your wages or your bank account within __ days prior to filing your Chapter 7 petition, the creditor will have to return the money to you.
  • Stop Repossession And Get Your Car Or Other Property Back – If a collector seized your car or other property and you file a Chapter 7 case within __ days, the creditor will have to return the seized property to you.
  • Stop Your Creditors, Including the IRS, From Filing Liens Against Your Property – As soon as you file a Chapter 7 petition, your creditors are forbidden from filing a lien against your property. This includes tax liens filed by the IRS or the State of Michigan.  Thus, timing is very important as, once the liens are filed, the debts become secured debts and, in many instances, they will no longer be dischargeable.
  • Discharge Your Unsecured Debts – Upon successful completion of a Chapter 7 case (which usually takes 3 – 4 months), all of your unsecured debts (such as amounts that you owe for credit cards, medical bills, past due utility payments, etc.) are discharged. This means that you can walk away from them and never have to worry about them again.  No one is allowed to ever contact you or call you about them or sue you and, if they try, you can sue them and collect money from them.
  • Discharge “Old” Income Taxes – If you owe income taxes from more than three years ago and the IRS assessed income tax debt at least 240 days ago and has not filed a tax lien, you can discharge the taxes owed in a Chapter 7 as long as you did not commit fraud or attempt to evade paying the taxes and you actually filed your tax return at least two years ago. (If the IRS filed a tax lien, a Chapter 7 will allow you to legally avoid paying the income tax until you sell or remortgage the property).  As was mentioned above, timing is important!

What Are The Other Advantages Of A Chapter 7?

In addition to all of the things that you can accomplish by filing a Chapter 7, there are also other benefits such as:

  • Automatic Stay Protection – As was described above, the biggest benefit of any bankruptcy is the protection that you get from the “automatic stay”. This means that at 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 that you filed.  This means that the collection calls and threats have to stop and that no one can sue you or continue a civil lawsuit against you.  If any of creditors ignore the bankruptcy stay, you can even sue them and collect money from them.
  • No Tax Consequences – Unlike a “debt settlement” or “debt negotiation,” where you settle with a creditor for less than the total amount owed and then have to pay income tax on the amount that is “charged off” or “forgiven” (after they send you a Form 1099 notifying the IRS of the “charge off”), you cannot be charged income tax on a debt that was discharged in bankruptcy.
  • Discharge of Mortgage Debt – If after receiving a Chapter 7 discharge of your mortgage debt, you decide to continue making your mortgage payments voluntarily, you will still have the option to stop making the payments and vacate and surrender the property even many years after the bankruptcy — without any tax liability or possibility that the creditor can seek a deficiency judgment against you.

Do I Qualify For A Chapter 7?

In order to be eligible for a Chapter 7, you must first pass the “Means Test” — a complicated mathematical formula that compares your average gross household income for the past six months (including by members of your household who are not filing bankruptcy, 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 people with higher incomes (eg. people who should be able to afford to pay their creditors) from filing a Chapter 7 bankruptcy and getting their debts discharged.

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

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

then you are eligible to file a Chapter 7.  (If you do not pass the “means test” you can still file a Chapter 13).

Additionally, prior to filing a Chapter 7, you must take an approved “credit counseling course”, which can be done online or via telephone in about an hour or less from the comfort of your home.

Will I Be Able To Keep My Assets If I File A Chapter 7?

In most cases, a person who files a Chapter 7 bankruptcy case will be allowed to keep their property.  Section 541 of the bankruptcy code provides that, as soon as you file bankruptcy, all of your property become part of what is known as the “bankruptcy estate.”  Think of the bankruptcy estate as a giant container that holds all of your property.  An individual debtor is then able to remove some “exempt” items from the container, such as personal clothing and household goods, some equity in a house or a vehicle, as well as retirement savings (like a 401(k) or a pension).  In many cases an individual debtor is able to exempt all of his or her assets in what is called a “no-asset case.”  In a Chapter 7 case, any remaining assets (that are not removed from the container) can be sold by the Chapter 7 Trustee, with the proceeds used to pay creditors a pro-rata share of their claim for what is owed — after the Trustee first takes a percentage of what is collected.

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

What Other Things Do I Need To Worry About Before Filing A Chapter 7?

Another thing that you need to consider prior to filing a Chapter 7 is whether or not you repaid any money to any of your friends or relatives within the “preference period” prior to filing bankruptcy.  In order to ensure that similarly situated creditors get equal treatment, the bankruptcy code provides that a Chapter 7 Trustee can avoid payments to ordinary creditors within 90 days prior to filing and payments to “insiders” within one or two years prior to filing a bankruptcy.  These payments are called “preferences.”

In other words, if you repaid more than $600 to one of your friends or relatives an then, within the “preference period” you file a Chapter 7 bankruptcy, the Chapter 7 Trustee can (and likely will) sue that person to get the money back from them.  This will likely force them to repay all or part of the money and/or cause them to incur substantial attorney fees to fight the Trustee.  (If you need to file bankruptcy right away and are concerned about preferences, you can always file a Chapter 13).

Unfortunately, in too many cases, attorneys file Chapter 7 cases for people without investigating “preferences” or discussing the damage that “preferences” can cause to the client.  That’s why before we file any Chapter 7 case, the Metro Detroit Bankruptcy Law Group will sit down with you to go over your complete financial picture to make sure that there are no hidden traps that will prevent you from a successful outcome.

Are There Any Disadvantages Of Filing A Chapter 7

While there are many things that you can accomplish in Chapter 7, there may be a couple of disadvantages in the short run.  First, a bankruptcy will be listed in the “public records” section of your credit report for 10 years after you file.  This means that, after receiving your discharge, you will have to work to repair your credit.  However, in many cases, it is much easier to fix your credit after a Chapter 7, as your other delinquencies (which hurt your score if they stay on) will drop off.  Additionally, a Chapter 7 discharge will likely improve your debt-to-income ratio, which will increase your credit score, depending upon what you do after receiving your Chapter 7 discharge.

Another disadvantage is that you will probably not be able to obtain credit right away after receiving a Chapter 7 discharge.  However, because the law does not allow you to get another discharge for 8 years, some companies will be willing to lend you money or give you a credit card with a small limit while you rebuild your credit — which can be done!  (We have a client who filed a Chapter 7 bankruptcy many years ago and wound up with a 750+ credit score after a few years).

What do I need to do to file Chapter 7?

If you want to take advantage of the benefits of a Chapter 7 that are described above, you need to immediately pick up the phone and call our office at 248-417-9800 or contact us online to set up an appointment for a FREE, no obligation, confidential consultation to discuss your financial situation, and get the process started by crafting a plan that reflects your specific financial goals.  Waiting is not going to make the problem go away — it will just make it worse.  That’s why we urge you to call us RIGHT NOW — so that you can get the “fresh start” that you deserve — as soon as possible.  Our phone lines are available 24 hours a day, so CALL US NOW at 248-417-9800.  We look forward to hearing from you.

 

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