How to File for Chapter 7 Bankruptcy by Stephen Elias, Robin Leonard, Albin Renauer

From the Publisher

This all-in-one book can help you find relief from overwhelming debt!

If you have more debt than you can possibly pay off, the bankruptcy system is there to help -- and with How to File for Chapter 7 Bankruptcy, you'll find the clear and user-friendly information, advice and forms you need to get through the entire process.

First, the book will help you determine whether you qualify for Chapter 7 --and whether it is the best way to deal with your debts. Then you'll find out how to:

Product Details

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Table of Contents

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In the chapters that follow, we explain how to complete the required bankruptcy paperwork, what happens to your debts and property when you file for bankruptcy, how to get help with your bankruptcy, and how to pick up the financial pieces once your bankruptcy is final, among other things. But before you get to these important topics, you need to figure out whether you can -- and should -- file for Chapter 7 bankruptcy in the first place. This chapter will give you an overview of the bankruptcy process and help you decide whether Chapter 7 bankruptcy is right for you.

Although you may not care much about the larger bankruptcy picture, understanding it will help you keep your situation in perspective. Knowing that you're not alone should also reassure you if you are feeling isolated or even like a failure.

Studies show that the most common reasons for filing for bankruptcy are:

• job loss, followed by an inability to find work that pays nearly as well
• medical expenses that aren't reimbursed by insurance or government programs
• divorce or legal separation, and
• small business failures.

Of course, none of these events would necessarily require bankruptcy if the people who experience them had adequate savings to weather the storm. But, for a number of reasons, most of us lack such savings. In fact, many of us are up to our eyeballs in debt, making ends meet from paycheck to paycheck. And when a recession hits, or jobs leave the country en masse and
the pink slips start flowing, many otherwise stalwart citizens findthemselves turning to bankruptcy for relief. Let's take a closer look at how we got so financially overextended.

The American economy is based on consumer spending. Roughly two-thirds of the gross national
product comes from consumers like us spending our hard-earned dollars on goods and services we deem essential to our lives. If you ever had any doubt about how important consumer spending is to our economy, remember that President George W. Bush wasted no time after the events of September 11, 2001, in urging Americans to spend more. And many other government leaders told us that spending was our patriotic duty. As Americans, we learn almost from birth that it's a good thing to buy all sorts of goods and services. A highly paid army of persuaders surrounds us with thousands of seductive messages each day that all say, "buy, buy, buy."

These sophisticated advertising techniques (which often cross the line into manipulation) convince us to buy. And for those of us who can't afford to pay as we go, credit card companies are relentless in offering credit to even the most deeply indebted of us. In fact, billions of credit card solicitations are mailed to U.S. residents each year -- roughly ten solicitations
for every man, woman, and child. And, perhaps surprisingly, the largest growth sectors for credit cards are college students and people with bad credit ratings. The college students are targeted because they are customers of the future -- and because their parents can be expected to bail them out if they get carried away with their new purchasing power. And people with bad
credit are solicited in large numbers because creditors have discovered that they will pay huge interest rates for debts run up on their cards, which leads to equally huge profits.

Readily available credit makes it easy to live beyond our means and difficult to resist the siren songs of the advertisers. If, because of illness, loss of work, or just plain bad planning, we can't pay for the goods or services we need, feelings of fear and guilt are often our first responses. But, as we've also seen, the American economy depends on our spending -- the more, the better. In short, much of American economic life is built on a contradiction.

As anyone who has ever tried to rent a car -- or even a movie -- knows, it's tough to get by without a credit card. And once you get that card, most credit card companies will make it very easy for you to take on more debt than you can handle. By charging high interest rates and penalties, credit card companies can cause your original debt to soar beyond any reasonable expectation. In many cases, the interest rates are so high that the companies involved would have been prosecuted for loan sharking in the not-too-distant past -- before the credit card industry systematically lobbied to do away with usury laws or to create exceptions to those laws for credit card interest rates. Credit card companies keep this system working by encouraging us to make the minimum payment, which stimulates us to make more credit purchases and eases us into debt loads far beyond our ability to ever pay them off. We now all owe our souls to the company store.

In this age of billion-dollar bailouts for poorly managed financial institutions, should you really feel guilt ridden about the debts you've run up? That's something only you can decide, but remember that large creditors expect defaults and bankruptcies and treat them as a cost of doing business. The reason banks issue so many credit cards is that it is a very profitable business, even though some credit card debt is wiped out in bankruptcies and never repaid.

Bankruptcy is a truly worthy part of our legal system, based as it is on forgiveness rather than retribution. Certainly, it helps keep families together, frees up income and resources for children, reduces suicide rates, and keeps the ranks of the homeless from growing even larger. And, perhaps paradoxically, every successful bankruptcy returns a newly empowered person to the ranks of the "patriotic" consumer. If you suddenly find yourself without a job; socked with huge, unexpected medical bills you can't pay; or simply snowed under by an impossible debt burden, bankruptcy provides a chance for a fresh start and a renewed, positive outlook on life.

Bankruptcy can also have its disadvantages -- economically, emotionally, and in terms of your future credit rating. The bankruptcy process can get intrusive. As part of your public filing, you are required to disclose your financial activities during the previous year or two,
as well as your debts and current property holdings.

Bankruptcy also carries a certain stigma. (Otherwise, why would we spend so much time talking you out of feeling bad about it?) Some people would rather struggle under a mountain of debt than accept the label of "bankrupt."

If you have a bankruptcy on your record, you will need to convince those who have business dealings with you that you made every effort to meet your financial obligations before resorting to bankruptcy. Whether you are renting or buying a home, buying or leasing a car, or seeking financing for a business, your bankruptcy will be counted against you, at least for several years (and it will stay on your credit report for ten years). And while you will be able to get credit cards after bankruptcy, you will have to pay the highest interest rate, at least for a while.

While these facts may seem like downsides, they collectively have an upside. For several years, you will find it very easy to be debt-free -- you will have to pay as you go because it will be tough to get credit. Filing for bankruptcy can be a harsh wakeup call, one that will give you a new perspective on the credit system. A bankruptcy temporarily removes you from the credit hamster wheel and gives you some time and space to learn to live credit free (or, at least, to fashion a saner relationship to the credit industry).

This book explains how to file for Chapter 7 bankruptcy. Its name comes from the chapter of the federal statutes that contains the bankruptcy law (Chapter 7 of Title 11 of the United States Code). Chapter 7 bankruptcy is sometimes called "liquidation" bankruptcy -- it cancels most of your debts, but you have to let the bankruptcy trustee liquidate (sell) your nonexempt property for the benefit of your creditors. (People who file for bankruptcy are allowed to keep certain necessities of life, known as "exempt" property, as explained further in "What Is Exempt Property?" below.) By comparison, Chapter 13 bankruptcy is called a "reorganization" bankruptcy because it allows you to keep all of your
property if you are willing to restructure your debt and pay some or all of it off over time.

Here is a brief overview of the Chapter 7 bankruptcy process, from start to finish.

The whole Chapter 7 bankruptcy process takes about three to six months, costs $299 in filing fees (unless you get a waiver), and usually requires only one brief meeting, out of court, with the bankruptcy trustee -- the official appointed by the bankruptcy judge to process your bankruptcy on behalf of the court. If you use a lawyer, you can expect to pay an additional $1,000 or more in legal fees. Of course, you can save most of this money by representing yourself with the help of this book (and, perhaps, typing services from a bankruptcy
petition preparer, and/or legal advice from a limited practice lawyer). See Ch. 10 for information on finding lawyers and petition preparers.

Before you can file for bankruptcy, you must consult a nonprofit credit counseling agency. The purpose of this consultation is to see whether there is a feasible way to handle your debt load outside of bankruptcy, without adding to what you owe.

To qualify for bankruptcy relief, you must show that you received credit counseling from an agency approved by the U.S. trustee's office within the 180 day period before you filed. The courts are split as to whether you can get credit counseling on the same day you file your bankruptcy papers. One court said same-day counseling is fine, as long as it takes place before
you file (In re Dixon, 339 B.R. 475 (E.D. Ark. 2006)); another said that you have to complete counseling no later than the day before you file (In re Cole, 347 B.R. 70 (E.D. Tenn. 2006)). To be safe, you should complete your credit counseling the day before or earlier.

Once you complete the counseling, the agency will give you a certificate showing that you participated. It will also give you a copy of any repayment plan you worked out with the agency.

There are a few exceptions to this counseling requirement. You don't have to participate if you are in the military on active duty, you are incapacitated, or you are prevented from participating because of a disability. You also don't have to get counseling if there is no agency available to you. For example, one court excused a debtor's failure to get counseling because no agency could provide counseling in the debtor's Creole language, and the debtor could not afford to hire an interpreter. (In re Petit-Louis, 344 B.R. 696 (S.D. Fla.
2006)).

The purpose of credit counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet. Counseling is required even if it's pretty obvious that a repayment plan isn't feasible (that is, your debts are too high and your income is too low) or you are facing debts that you find unfair and don't want to pay. (Credit card balances inflated by high interest rates and penalties are particularly unpopular with many filers, as are emergency room bills and deficiency judgments based on auctions of repossessed cars.)

The law requires only that you participate -- not that you go along with whatever the agency proposes. Even if a repayment plan is feasible, you aren't required to agree to it. However, if the agency does come up with a plan, you must file it along with the other required bankruptcy paperwork. See Ch. 6 for more information on the credit counseling requirement, including how to get the certificate of completion that you'll have to file with your other bankruptcy papers.

In addition to providing services without regard to your ability to pay, counseling agencies have to meet a number of other requirements. They must:

• disclose to you their funding sources, their counselor qualifications, the possible impact
  of their proposed plan on your credit report, the costs of the program, if any, and how much of the costs will be born by you
• provide counseling that includes an analysis of your current financial condition, factors that caused the condition, and how you can develop a plan to respond to the problems without adding to your debt
• use trained counselors who don't receive any commissions or bonuses based on the outcome of the counseling services (that is, the counselors themselves may not receive kickbacks, although kickbacks to the agency may be legal), and
• maintain adequate financial resources to provide continuing support services over the life of any repayment plan. For example, if they propose a three-year payment plan, they must have adequate reserves to service your case for three years.

To begin a Chapter 7 bankruptcy case, you must complete a packet of forms and file them with the bankruptcy court in your area. Many filers are shocked to see the long list of documents that might be required in a Chapter 7 case, particularly after Congress added even more paperwork requirements in the new bankruptcy law. But don't be alarmed: Many of these forms require very little time and effort to fill in, and most filers won't have to complete them all. Just take things one step at a time, following the detailed instructions in Ch. 6, and you'll do just fine.

Once you file the papers described below, the court will send a notice of your bankruptcy filing to all of the creditors listed in your bankruptcy documents. You will get a copy as well. This notice (called a "341 notice" because it is required by section 341 of the bankruptcy code) sets a date for the meeting of creditors (see "The Meeting of Creditors," below), provides the trustee's name, address, and telephone number, and gives
creditors the deadlines for filing objections to your bankruptcy or to the discharge of particular debts.

You begin a Chapter 7 case by filing a "Voluntary Petition": the official court form that requests a bankruptcy discharge of your debts. This form asks for some basic information, including your name, address, and the last four digits of your Social Security number; information about your creditors, debts, and property; and whether you have lived, maintained a residence or business, or had assets in the district where you are filing for most of the 180 you file (this gives you the right to file in that district). You'll find line-by-line instructions for completing the Voluntary Petition in Ch. 6.

You will have to submit quite a few more documents, either when you file the petition or (with a few exceptions) within 15 days after you file. These additional documents include lists of your creditors, assets, debts, income, and financial transactions prior to filing; copies of your most recent federal tax return; wage stubs for the previous 60 days; a list of property
you are claiming as exempt (that is, property that you are entitled to keep even though you are filing for bankruptcy); information on what you plan to do with property that serves as collateral for a loan (such as a car or home); proof that you have completed your prefiling
credit counseling; and, later in your bankruptcy case, proof that you have completed budget counseling.

Perhaps the most important form -- made necessary by the new bankruptcy law -- requires you to compute your average gross income during the six months prior to your bankruptcy filing date and compare that to the median income for your state. If your income is more than the median, the same form takes you through a series of questions (called the "means test") designed to determine whether you could file a Chapter 13 bankruptcy and pay some of your unsecured debts over time. The outcome of this test will largely determine whether you can file for Chapter 7 bankruptcy. (See "Who Can File for Chapter 7?" below, and Ch. 6, for
detailed information about these calculations.)

After you file, you may want to amend some or all of your forms to correct mistakes you discover or to reflect agreements you reach with the trustee. Amending these forms is fairly simple -- we explain how to do it in Ch. 7.

If you need to stop creditors quickly, you can do so without filing all of the bankruptcy forms we describe in Ch. 6 (although you'll eventually have to complete the full set). In some situations, speed is essential. For example, if you face foreclosure and your house is going to be sold in a few days, or your car is about to be repossessed, filing an emergency petition will stop the repossession or foreclosure cold.

To put an end to collection efforts, you can simply file the three-page Voluntary Petition form called a Creditors' Matrix, which lists the name, address, and zip code of each of your creditors, and a form providing your complete Social Security Number. On the petition, you'll have to either swear that you've completed credit counseling or explain why emergency circumstances prevented you from doing so. The automatic stay, which stops collection efforts and lawsuits against you, will then go into effect. (Ch. 2 covers the automatic stay in detail.) You'll have 15 days to file the rest of the forms. (Bankruptcy Rule 1007(c).) See Ch. 6 for line-byline instructions on completing the paperwork.

You should file on an emergency basis only if you absolutely must. Many emergency filers fail to meet the 15 have their petitions dismissed as a result. Because you are rushing, you are more likely to make mistakes that have to be corrected later, which just adds work and potential errors to the process. But if filing an emergency petition is the only way to stop a potentially disastrous creditor action, go for it. Just remember the deadline for filing the rest of the forms.