Bankruptcy, Debt Relief & Foreclosures
Chapter 7 Bankruptcy -- What is it and how does it work?
Chapter 7 Bankruptcy is most useful for eliminating unsecured debt (credit card debt, medical bills, signature loans and most tax debts incurred more than three years ago) for those individuals and families who are having trouble making ends meet. Often times, a job loss, medical condition, divorce, or unexpected loss of a wage earner in the family creates an economic hardship. Bills pile up until it seems like you are in a hole from which you will never be able to climb out. Chapter 7 Bankruptcy is designed to allow you to wipe out that mountain of unsecured debt and provide you and your family a chance to pursue a fresh financial start. The bankruptcy laws are on your side – they are designed to help you, not hurt you.
Eligibility to File Bankruptcy Under Chapter 7 and the "Means Test"
Individuals and married couples must have financial circumstances that cause them to be eligible for Chapter 7 Bankruptcy relief. A Chapter 7 Bankruptcy discharge of debt is available to those individuals and married couples who either fall below the median household income limit for Florida based on census data, or who meet what is called the “means test.” During our consultation, I will ask you questions about your household income and expenses during the past six month period. I will analyze your circumstances and determine whether you fall under the median household income ceiling, or if not, whether you may meet the means test and are eligible for Chapter 7 Bankruptcy. Based upon a review of your household income, household expenses, exempt and non-exempt property, certain federal guidelines, and other relevant factors, I will give you my candid appraisal of your situation and explain the bankruptcy options to you. If it turns out that you are not eligible for filing a Chapter 7 Bankruptcy, we will then discuss whether a Chapter 13 Bankruptcy would meet your needs. Of course, bankruptcy is not always the best or only option. Other potential solutions outside of bankruptcy will be considered and discussed.
Unsecured versus Secured Debt
If you are considering filing bankruptcy, it is important that you do not incur or take on any more debt. It is also important to recognize the distinction between unsecured and secured debt. Credit card debt and medical bills are examples of unsecured debt. A "signature loan" is another example of an unsecured debt. In these examples, there is no property that serves as collateral in the event of a default or failure to pay the debt when due. On the other hand, your automobile loan and mortgage are two examples of secured debts as is a home equity line of credit. As more fully discussed below, in most cases, a debtor filing for Chapter 7 Bankruptcy may retain their home and their car provided that they remain current on those securitized loans before, during and after the bankruptcy filing. In addition to staying current on all payments, the creditor will request and you will be required to sign a “reaffirmation agreement” for all secured obligations for property that you wish to retain. If applicable, I will review this agreement with you and advise you of your legal rights. Of course, there may be situations where the individual or couple filing bankruptcy wishes to walk away from a house or car and the underlying debt obligation that goes with it. If you owe significantly more than the property is worth, it may make sense to surrender the property in the Chapter 7 Bankruptcy and wipe out the debt in its entirety.
Retaining and Paying for Your Cars and Homestead Property
If you have a home and automobile that you wish to retain and continue to use during and after your bankruptcy, you may do so, in most cases, provided that you remain current on your payments before, during and after your bankruptcy filing. There are certain exceptions and limitations. For instance, if you are driving a 2010 Porsche or some other luxury vehicle and making a substantial payment on it, the Chapter 7 Trustee is unlikely to allow you to continue to do so.
Non-exempt versus Exempt Property; Fair Market Value Standard
Florida law specifies what property is exempt from creditors and, with some types of property, sets monetary limits on the amount that may be protected as exempt. Under Florida law and subject to a few exceptions, the following property is generally exempt:
- Homestead Property. The Florida Constitution generally permits you to protect the equity in your primary physical residence from the reach of creditors, with a few exceptions. Your attorney will assess such factors as the size and location of your property, the length of time you have resided there, and the amount of equity you possess in your home.
- Automobiles. Up to $1,000 in equity in an automobile may be exempted and protected by each individual filing bankruptcy. Therefore, a husband and wife filing bankruptcy can exempt and protect $2,000.00 in total equity in their vehicles.
- Personal and Household Property. Each individual filing bankruptcy may claim up to $1,000 in personal and household property as exempt. Therefore, a husband and wife filing bankruptcy together in Florida may claim up to a total of $2,000.00 of personal and household property as exempt. This includes any cash on hand or in a checking or savings account at the time of filing. The basis for valuation of physical property is fair market value. In other words, what would your property likely fetch if sold off at an auction or garage sale? Usually, the answer is: not for very much.
- Retirement Plans and Certain Investments. With certain limits and exceptions, most forms of retirement plans and educational savings accounts are generally exempt and protected under Florida law. These include 401k plans, annuities, IRAs, pensions, and even health savings accounts.
- Wages. Wages earned by a head of household are generally exempt under federal and Florida law.
Property of the Bankruptcy Estate
Property you own in a Chapter 7 case becomes the property of the "Bankruptcy Estate," and must be turned over to the Chapter 7 Trustee to the extent that it is not claimed as “exempt” or protected by Florida law. If an individual or couple contemplating bankruptcy has significant amounts of non-exempt property that they do not wish to surrender, then a Chapter 13 Bankruptcy case may be the best option as more fully discussed below. Otherwise, in a Chapter 7 Bankruptcy case, the Trustee takes possession of all non-exempt property and sells it for the benefit of the creditors unless the Trustee determines that the value of the property is insufficient to realize a positive return. Most Chapter 7 cases that are filed, however, are “no asset cases” – meaning that the person filing bankruptcy does not to surrender any property and keeps everything they own. Even in cases where exemption limits may be exceeded, there are options available other than surrendering the non-exempt property to the Trustee. The debtor is normally given the first opportunity to “redeem” the non-exempt property. A redemption occurs when the individual filing bankruptcy buys back the property from the Trustee by paying an amount of money equal to the non-exempt equity in the property. These payments may be made to the Trustee over time. For instance, if you own a car that is worth $1,500.00, Florida law allows you to exempt and protect $1,000.00 in equity in that vehicle. Therefore, $500.00 of the value of the automobile is non-exempt. Rather than surrendering the vehicle to the Trustee, you may agree to pay the Trustee $500.00 over a period of months. This allows you to keep your car even though not all of the equity in it was exempt.
Preparing and Filing your Bankruptcy Petition and Schedules
Once you have retained the law firm and paid the flat rate attorney fee, your bankruptcy petition and schedules will be prepared for electronic filing with the Bankruptcy Court. The petition and schedules comprise a roughly 50 page document that you must attest to the truthfulness of and sign under oath. The United States Trustee’s Office prosecutes cases of bankruptcy fraud, and has the authority in conjunction with the U.S. Attorney’s office to pursue severe criminal and civil penalties against those who commit fraud or seek to abuse the bankruptcy process. Therefore, from the moment you first consult a bankruptcy lawyer, it is important to truthfully disclose not only all assets and debts that you possess, but also any assets that you may have transferred out of your possession during the last several years. Additionally, you are required to disclose all sources of income and accurately state the amount of income you receive. Before your case is filed, you will need to provide photocopies of certain documentation to my office so that it may be provided to the Trustee assigned to your case in advance of your Section 341 Meeting of the Creditors. These documents include recent tax returns, pay stubs, bank statements, home ownership documentation, vehicle documentation, and retirement account statements. Depending on your circumstances, it may also be advisable to obtain an appraisal on your vehicle at this time.
The Section 341 Meeting of Creditors
After your bankruptcy petition and schedules are completed, they are filed with the Bankruptcy Clerk of Court. Together, we will attend a meeting with a Chapter 7 Trustee in either Tampa or Fort Myers, depending on where you reside. Residents of Sarasota County, including North Port, Venice, Englewood and Sarasota are required to attend the meeting in Tampa. Residents of Charlotte County and Desoto County, including Port Charlotte, Punta Gorda, parts of Englewood, and Arcadia must travel to Fort Myers. While this meeting is called the “Section 341 Meeting of Creditors,” creditors rarely attend the meeting. In the event they do attend, it is usually to determine whether you wish to keep paying for and retain secured property such as your automobile and to present you with a reaffirmation agreement. In most cases, the meeting of creditors is a brief event, lasting no more than 5 or 10 minutes. The questions are primarily those questions I will have already asked you when we meet to review and sign your bankruptcy petition and schedules. You are required to bring your drivers license and social security card with you to this meeting as proof of identification. It is important to arrive a little earlier than your scheduled meeting time so that we may have a chance to speak.
PLEASE NOTE: Unlike many bankruptcy lawyers and law firms, I will personally attend the meeting of creditors with you. While many bankruptcy lawyers pay $50 to hire a “stand in” to appear – some attorney who does not know you or your case -- please rest assured that I understand that my clients want and expect to see my familiar face at this important meeting with them when they meet with the Trustee. I consider it important that you receive the personal and professional representation that you are hiring me for every step of the way.
Your Bankruptcy Discharge
Finally, the Court will enter your bankruptcy discharge approximately sixty (60) after your meeting with the Trustee. The bankruptcy discharge operates to extinguish all dischargeable debts in your name. Of course, you will continue to be responsible for making payments on any secured debts that you wish to reaffirm, i.e., your home and automobile that you plan to retain and use. Certain other types of debts are not dischargeable through Chapter 7 bankruptcy. These non-dischargeable debts include recent taxes and tax penalties, child and marital support obligations, student loans, and criminal fines, penalties, and restitution.
Upon the receipt of your discharge, you are free to begin building your good credit rating and pursue a fresh financial start. The Chapter 7 Bankruptcy discharge will remain on your credit report for up to ten (10) years from the date of the entry of discharge; however, you will find out sooner that creditors are willing to extend credit to you in moderation provide that you have a stable work history and remain on time with all of your future payments and financial obligations.
You should find that rebuilding and establishing a good credit rating after receiving your bankruptcy discharge is achievable. Remember, the bankruptcy laws are designed to help you rebuild and pursue a fresh financial start. In the future, prospective creditors will begin to evaluate you as a good credit risk. Why? For one, you will no longer suffer from unmanageable debt and the inability to make yet another payment. With the threats to your income by competing creditors eliminated through bankruptcy, wage earners have the ability to take on new credit and reliably make a payment on time. It is possible to buy a car, obtain a credit card, and make other credit purchases within a short time of receiving a Chapter 7 discharge of debts. Your ability to save money and make a good down payment will certainly influence the positive extension of credit in your favor. Another reason you will likely be viewed as a good credit risk is simple: you will not be eligible to file Chapter 7 bankruptcy again for at least 8 years from receiving your discharge. Of course, you will want to take on and use credit after your bankruptcy both sparingly and wisely. Expect to pay at least a few more percentage points in interest in the first few years after bankruptcy. You may even buy a new home in as little as two (2) years after receiving your bankruptcy discharge. Once again, the size of your down payment and your work history will largely dictate your loan terms. All in all, nothing should prevent you from pursuing the fresh financial start that Congress intended to make available to you with the enactment of the Bankruptcy Code.
If you would like to learn more about Chapter 7 bankruptcy or discover whether bankruptcy may be an option for you...
Call North Port bankruptcy lawyer James Keim (941) 426-7900