Chapter 7 Bankruptcy Questions and Answers
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Q: What is a Chapter 7 Bankruptcy?
A: “Chapter 7” is what most people think of when they hear the term “bankruptcy”. It is also referred to as a “straight” bankruptcy or “fresh start” bankruptcy. It is a relatively simple and short procedure where the goal is to get a court order, called a “discharge” that relieves you of your obligation to repay unsecured debts such as credit cards, medical bills and personal loans. (Back to Top)
Q: How do I know if a Chapter 7 Bankruptcy is right for me?
A: It depends on the facts of your situation. I encourage you to call me to discuss the basic facts of your case. There is no charge for a telephone conversation. In most cases, it takes just a few minutes to determine whether bankruptcy makes sense for you.
Q: When should I contact an attorney about filing for bankruptcy?
A: If you are reading this page you have probably been wrestling with financial issues for months, if not years. The sooner you get accurate information regarding the bankruptcy process the better position you will be in to make the most of your financial situation. (Back to Top)
Q: What do I need for my first appointment?
A: To begin your case, we will set up an initial appointment at a time convenient for you. You will be asked to bring in proof of income from all sources for the six months preceding the month you file in. You will also need to bring with you copies of your two most recently filed federal income tax returns. And you need to bring in all your creditor information. The best source of that information is the most recent statement you have received from a creditor. If you are no longer receiving monthly statements, then a collection letter from a collection agency or law firm can be used. Credit reports can also be used to supplement other information. (Back to Top)
Q: What is the best way to obtain a credit report?
A: The best way to obtain credit reports is to go to annualcreditreport.com, a website set up to provide free credit reports to individuals once per year for free. Just go to the website, click on the credit reports tab and follow the instructions. (Back to Top)
Q: Do I have to complete a credit counseling class before I can file my case?
A: Yes. Before you can file your case you must complete an approved credit counseling class. Contact my office for information on how to go about satisfying this requirement. (Back to Top)
Q: Do I have to qualify for a Chapter 7?
A: Yes. Since October of 2005 your income must fall below a certain threshold based on household size. Income averages for household sizes from 1 to 6 are listed below, as of 11/01/2019:
Household Size Annual Monthly
1 $66,309 $5,526
2 $78,823 $6,569
3 $90,921 $7,577
4 $105,568 $8,797
5 $114,568 $9,547
6 $123,568 $10,297
Note - Even if your income exceeds the average monthly allowed gross, you still may be eligible to file a Chapter 7 once actual secured debts, taxes and other deductions are factored in. (Back to Top)
Q: Do I have to appear in Court?
A: Technically, no. Most of you will never see a bankruptcy judge. You will however, have to make one appearance at an administrative hearing, called a “341 meeting” or “meeting of creditors”, which is held roughly 30 days from the date you file your petition. (Back to Top)
Q: What happens at the 341 hearing?
A: The purpose of the 341 meeting is for the trustee who has been assigned to your case to make a formal finding on the record that there are, or are not, any assets for he or she to administer. The trustee will have already reviewed your petition, and generally, if he or she has any concerns they will have asked your attorney about them already. In most cases, the hearings last 5 minutes or less. (Back to Top)
Q: What happens after the 341 hearing?
A: In most cases, nothing. Your case stays open for sixty days following your hearing, and, unless someone files an objection to your discharge, the case will be closed and your discharge order entered and mailed to you within a week of the closing of your case. The only thing you need to do in the meantime is to complete your second counseling class, called a Debtor Education class. (Back to Top)
Q: What about secured creditors?
A: Secured creditors are those creditors who have collateral that secures your obligation to them, such as a mortgage on a home or lien on a vehicle. They may also have a lien called a Purchase Money Security Interest (PMSI) for items of personal property purchased at proprietary stores such as Best Buy or a jewelry retailer. You must make a formal election as to your intent with your secured creditors. (Back to Top)
Q: Can the court dismiss my case..?
A: Maybe. Section 707 of the Bankruptcy Code sets forth criteria the Court can use to dismiss a case filed under Chapter 7. Section 707 has two subsections, (a) and (b).
Under subsection (a), a court may dismiss a Chapter 7 case only after notice and a hearing, and only “for cause”, including (1) unreasonable delay by the debtor that is prejudicial to creditors; (2) nonpayment of fees or charges; and (3) failure of the debtor required under the code.
Under subsection (b), a court may dismiss a Chapter 7 case only after notice and a hearing, and only after a finding of “abuse”.
Non-Consumer Debt Cases Not Subject to the Means Test - Chapter 7 debtors with primarily business debt, which includes tort claims against a debtor and tax liabilities, are not subject to the “means test” adopted in the 2005 Bankruptcy Reform Act. In addition, they are not subject to any of the provisions of the Bankruptcy Code allowing Chapter 7 cases to be dismissed for “abuse” under Section 707(b).
Under Section 707(b) of the Bankruptcy Code, for consumer debtors, “abuse” is presumed if a debtor fails the means test, but a case can also be dismissed for abuse if the “totality of the circumstances” (generally speaking, excess disposable income with, or in some jurisdictions without, other factors) shows “abuse,” or if the “petition was filed in bad faith.”
None of these provisions apply if the debts are not primarily consumer debts, such as business debts, tort claims, and tax liabilities. In those cases, only Section 707(a) applies, permitting dismissal “only for cause.” “Cause” is not defined, but the Code gives three examples: “unreasonable delay by the debtor that is prejudicial to creditors,” nonpayment of any required court fees, and failure of the debtor to file required documents.
The 9th Circuit Court of Appeals, which has jurisdiction over bankruptcy cases filed in the state of Washington, has held that if there is another Code provision that addresses the subject matter of the alleged cause, then it is not “cause” for dismissal under § 707(a). Because Congress included both excess disposable income and bad faith under § 707(b), but limited them to consumer cases, neither bad faith nor excess disposable income can constitute cause for dismissal of a non-consumer case.
Consumer Debt Cases Subject to the Means Test –
If no presumption of abuse is established by the means test, then the only basis to dismiss is under 707(b)(3)(A) for bad faith or under 707(b)(3)(B), totality of circumstances.
Bad Faith –
Because the Bankruptcy Code does not define the term "bad faith, " the courts have examined case law determining bad faith in Chapter 13 bankruptcy cases and considered the following nine factors in determining whether a debtor's bankruptcy petition in a Chapter 7 bankruptcy case was filed in bad faith and thus should be dismissed under § 707(b)(3)(A):
(1) whether the Chapter 7 debtor has a likelihood of sufficient future income to fund a Chapter 11, 12, or 13 plan which would pay a substantial portion of the unsecured claims;
(2) whether debtor's petition was filed as a consequence of illness, disability, unemployment, or other calamity;
(3) whether debtor obtained cash advances and consumer goods on credit exceeding his or her ability to repay;
(4) whether debtor's proposed family budget is excessive or extravagant;
(5) whether debtor's statement of income and expenses misrepresents debtor's financial condition;
(6) whether debtor made eve of bankruptcy purchases;
(7) whether debtor has a history of bankruptcy petition filings and dismissals;
(8) whether debtor has invoked the automatic stay for improper purposes, such as to delay or defeat state court litigation; and
(9) whether egregious behavior is present.
You will note that the 9th Circuit has stated that high income alone is not evidence of bad faith.
Dismissal Based on "Totality of Circumstances" -
No guidance is provided in §707(b)(3)(B) as to the factors a bankruptcy court should consider in evaluating a request for dismissal of a bankruptcy case for abuse under the totality of the circumstances, other than that those circumstances should relate to " the debtor's financial situation." However, courts have often conducted the same inquiry to support a dismissal under the totality of the circumstances test as is conducted to establish bad faith under §707(b)(3)(A). (Back to Top)
Q: If I am denied a discharge in a Chapter 7 based on §727(a)(2), can I file a Chapter 13..?
A: Yes. While the Court can deny a discharge in a Chapter 7 under 11 U.S.C. §727(a)(2) for intending to hinder, delay or defraud a creditor by transferring, removing, destroying, mutilating or concealing property, or permitting anyone else to do so, you can immediately prepare and file a Chapter 13. 11 U.S.C. §523(a)(10), which prevents you from getting a discharge in a Chapter 7 if discharge was denied in a previous Chapter 7, does not apply to cases filed under Chapter 13. (Back to Top)
Q: Can I file a Chapter 7 if I am involved in the marijuana business..?
A: No. In Colorado, a state that has legalized marijuana, a Bankruptcy Court denied liquidation protection (under Chapter 7 of the Bankruptcy Code) because the Chapter 7 trustee appointed by the U.S. Bankruptcy Court to administer and liquidate the marijuana business, plants and assets would not be able to take control of those assets without himself violating the Federal Controlled Substances Act, 21 U.S.C. §801 et seq., (CSA), including the CSA’s prohibition of distribution of a Schedule I controlled substance. Ultimately, the Court found that administration of that case under Chapter 7 was impossible without involving the Trustee in ongoing criminal violations of the CSA.
There have been no reported cases on the issue in Washington State, so the question is still open whether a Chapter 7 may be filed where the debtor is engaged in the marijuana business but no assets would be administered by the Trustee.
However, the 9th Circuit Bankruptcy Appellate Panel just issued a decision in February of 2018 that overturned the dismissal of a debtor's case, which the lower court had dismissed based on it's belief that the landlord debtor was receiving rental income from a marijuana dispensary. The decision is significant because it holds that a bankruptcy cannot be dismissed simply because of the mere presence of a marijuana business or related proceeds in the case. Back to Top) (Back to Top)
Q: What is cross-collateralization..?
A: Cross-collateralization is where a lender uses the collateral that secures one loan, typically a car loan, to secure payment on another, generally unsecured loan, line of credit or credit card account. For example, say you have a car worth $12,000 subject to a lien from your credit union for $10,000. You also have a VISA card with the same credit union with a balance of $5,000. The effect of cross collateralization is that to keep the vehicle, you must agree to pay off the otherwise unsecured debt up to the value of the collateral, in this example the $2,000 difference between the value of the vehicle and the amount owing on the vehicle. However if the numbers in the above example were reversed, i.e., the car is worth $10,000 but subject to a $12,000 lien, then there would be no equity for the unsecured debt to attach to, and therefore you could elect to keep the car without having to repay any of the unsecured debt. (Back to Top)
Q: Is child support dischargeable in a Chapter 7..?
A: No. 11 U.S.C. §523(a)(5) specifically provides that a domestic support obligation, i.e., child support, is not dischargeable in a Chapter 7. (Back to Top)
Q: If I am married, can I file Chapter 7 without my spouse..?
A: Yes, a married person can file their own individual bankruptcy, provided you can pass the Means Test. You would have to include your non-filing spouse’s income in the Means Test unless you are physically separated.
However, in Washington, a community property state, you may not want to file an individual Chapter 7 if you are married. The reason is that the filing of an individual bankruptcy petition by a spouse creates an estate which encompasses community property that is under the spouse's joint management and control as of the date the petition is filed.
And the right to claim exemptions in equity in property of the bankruptcy estate vests solely with the filing spouse. So if you have more than a small amount of equity in community property, you may either be forced to sell the property, or to buy the property back from the Trustee who is administering your case. (Back to Top)