Bankruptcy

The following is a list of questions our clients usually ask us about bankruptcy in general and Chapter 7, in particular, followed by our answers. If you would like more information please do not hesitate to call us at (781) 741-5000

What is bankruptcy?

“Bankruptcy” protects the debtor – that’s you – from the creditor, the person to whom you owe money. It refers to a federal code of laws and set of rules which are designed to help people who are overwhelmed by debt to achieve a “fresh start”. There are several kinds of bankruptcy, depending upon the debtor’s status. The most common types of bankruptcies affecting consumers, however, are “Chapter 7” and “Chapter 13” bankruptcies, referred hereafter as Chapter 7’s and Chapter 13’s.

What is a Chapter 7?

A Chapter 7, in theory, is designed to allow people to liquidate their assets and give them to a trustee appointed by the court to investigate the debtor’s estate. In turn, the trustee sells the assets and gives the proceeds to the creditors until they are exhausted. After that, the Court issues a “Discharge” to the debtor who is discharged from any further obligation to pay the creditors. In reality, however, most people who file a Chapter 7 don’t lose anything in the process before they are discharged because federal and/or state laws allow debtors to keep certain possessions and real estate out of the reach of their creditors through a process called “exemptions”. Whether you, as a potential Chapter 7 debtor would lose any of your estate to your creditors would depend upon your own circumstances and that is why you should consult with a lawyer.

Am I eligible for a Chapter 7?

Not everyone qualifies for a Chapter 7, however. For example, a debtor is ineligible if he/she has been granted a discharge in a Chapter 7 or Chapter 11 case within the previous eight years, or generally, has filed a Chapter 13 case within the previous six years. Debtors who have filed Chapter 7 or Chapter 13 cases within 180 days of a later filing are also ineligible, as are debtors who have not received, during the 180-day period prior to the filing of the current bankruptcy petition, a briefing from an approved nonprofit budget and credit counseling agency, unless an exemption applies. Lastly, Chapter 7 filers (and Chapter 11 and 13 filers) have to address the “means test” that was made part of the 2005 Bankruptcy Reform Act.

What is the “means test”?

The “means test” is the most famous part of the 2005 Bankruptcy Reform Act and it is a mechanism designed to scrutinize the current monthly income of debtors with primarily consumer debts and to force more of them into Chapter 13 bankruptcies. This is important because, under chapter 7, most of a debtor’s non-priority unsecured debts will be discharged. The first step in the “means test” process is to look at your income to determine whether it is more or less than the median income in your state. If your income is less than the median (based on the six month period immediately prior to the bankruptcy), then you pass and do not have to take the “means test”. If you earn more than the median, then it is on to the next step in which you must figure out whether you would have enough left over from your current monthly income, after subtracting certain expenses, to repay some of your debt. The “means test” figures are periodically updated; however, the following were the median family income values for Massachusetts as of March 15, 2011:

What is a Chapter 13?

Wage earners who are not eligible to file under Chapter 7 may be eligible to file for bankruptcy protection under Chapter 13. Chapter 13 is the debt repayment chapter for individuals (including those who operate businesses as sole proprietorships) who have regular income, whose secured debts do not exceed $1,010,650 and whose unsecured debts do not exceed $336,900. (Note that these debt limitations are as of September 2009 and change from time to time). A Chapter 13 is not available to corporations or partnerships. A major advantage of Chapter 13 is that it generally permits individuals to keep all of their property by repaying creditors out of their future disposable income. The chapter 13 debtor proposes a repayment plan which must be approved by the Bankruptcy Court. The debtor pays the amounts set forth in the plan to the chapter 13 trustee, who distributes the funds to creditors in return for a small fee. The chapter 13 debtor receives a discharge of most debts after the debtor completes the payments required under the plan. The typical plan used to be 3 years but, under the 2005 Act, more people are being required to pay over 5 years.

What is the automatic stay?

Filing a bankruptcy petition "automatically stays" (stops) most collection actions against the debtor or the debtor's property. The stay arises by operation of law and requires no judicial action. But there are several exceptions, including criminal proceedings, collection of certain alimony and child support obligations and governmental actions to protect the public. The automatic stay is temporary and will end as to the debtor when discharge is granted (at which time the discharge protects the debtor) or denied, when the case is dismissed or closed, or if the Bankruptcy Court grants a creditor or other party relief from the automatic stay for reasons provided in the Bankruptcy Code. However, as long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments, without the approval of the bankruptcy court.

Is credit counseling mandatory?

Yes. Everyone who files for bankruptcy must first receive credit counseling from a nonprofit agency approved by the Court. It can be done over the phone or on the Internet but it must be done within the six months before the bankruptcy filing. A certificate of completion from the counseling agency must be filed with the Court.

What is a discharge?

A bankruptcy discharge is a court order that relieves a debtor from personal liability for some specific types of debts. The discharge order permanently prohibits creditors from taking action to collect discharged debts from the debtor and, with very limited exceptions, against income and property that the debtor acquires after the bankruptcy filing. When a debt has been discharged, the creditor can no longer seek repayment. The discharge is the primary benefit most debtors obtain from bankruptcy. It is, however, important to understand that not all debts are dischargeable and creditors may still seek repayment for debts that are not discharged. Moreover, a debtor’s discharge may be denied or revoked. The submission of fraudulent information by the debtor to the Court or the concealment of assets by the debtor are grounds for the denial of a discharge.

Are all debts discharged in bankruptcy?

Not all debts are discharged. The following two categories of debts will generally not be discharged.

Secured Debts: The discharge does not affect a creditor's lien against collateral (e.g., a home mortgage or automobile loan), so it does not prevent a creditor who holds a lien from enforcing that lien after the automatic stay (discussed above) terminates or is lifted by the Court. Unless the debtor reaffirms the secured debt or redeems the collateral, the secured creditor can seize the collateral, sell it, and use the proceeds to satisfy its claim. But this is all the secured creditor can do. Unless the secured debt is also a nondischargeable debt (as discussed below), the discharge prohibits the secured creditor from collecting the balance (sometimes called a "deficiency claim") if the collateral is worth less than the claim.

Nondischargeable Debts: A discharge order does not apply to certain kinds of debts. These differ according to the chapter under which the bankruptcy petition is filed.

In a chapter 7, numerous categories of debts are excepted from the discharge. Most of these debts are automatically excepted from discharge, without the creditor having to take any action. The most common of such nondischargeable debts are:

  1. many tax debts
  2. alimony and child support obligations, as well as debts to a spouse or former spouse that arose from a divorce or separation agreement, court order or determination by a governmental agency
  3. student loans, unless repayment would impose an undue hardship on the debtor or his or her dependents

Some debts are excepted from discharge only if the creditor timely files a separate complaint, called an adversary proceeding, objecting to the discharge of the debt and the Bankruptcy Court issues an order to that effect. These include:

  1. debts arising from fraud or false representations
  2. debts for embezzlement, larceny, or the mishandling of funds that the debtor held as a trustee or fiduciary
  3. debts for willful and malicious injury

In a chapter 13 case, the discharge available is slightly broader. Some of the debts not dischargeable in a chapter 7 case may be dischargeable in a chapter 13 case.

Is a discharge guaranteed/automatic or may interested parties, including creditors, object to the discharge?

In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the United States Trustee. Creditors receive a notice shortly after the case is filed that sets forth important information, including the deadline for objecting to the discharge. In order to object to a debtor’s discharge, a creditor must file a complaint called an adversary proceeding before the deadline set out in the notice. Once the deadline to object to a debtor’s discharge passes, and if no objections have been filed, the Bankruptcy Court will grant the chapter 7 debtor his or her discharge. This will typically occur approximately three months after the meeting of the creditors, which is approximately four months after the debtor files the bankruptcy petition.

The Bankruptcy Court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to complete a course on personal financial management; failure to cooperate with the Trustee’s investigation of pre-petition financial affairs; concealment of property within one year prior to the bankruptcy or after the case is filed; making of a false statement under oath in the bankruptcy case; presentation or use of a false claim; or refusal to obey a lawful order of the court.

In chapter 13 cases, the debtor is usually entitled to a discharge upon completion of payments under the plan. Most plans take between three to five years to complete, so that is also about how long the chapter 13 debtor will wait for the discharge order. As in chapter 7, a discharge may not occur in a Chapter 13 if the debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in chapters 7 and 13 if he or she received a prior discharge in another case commenced within the time frames discussed elsewhere herein.

What happens after I file my bankruptcy with the Court?

The formal process begins with the filing of the bankruptcy with the bankruptcy court. In the case of a Chapter 7, the petition will be accompanied by the schedules of the debtor’s assets and liabilities, statements of income and expenses, and a statement of the financial affairs of the debtor. The schedules will also identify those assets that are “exempt” from the claims of your creditors (In other words, those assets that the bankruptcy code or state law let you keep). When the case is docketed by the Court, a Chapter 7 Trustee will be appointed to review the case and the Court will also schedule the case for the §341(a) Creditors Meeting – typically 30 45 days after the filing. At the Creditors Meeting, the Chapter 7 Trustee will ask you questions about the documents that you filed and will allow any creditors who choose to appear (most don’t) to ask you questions, as well. Assuming that the Trustee is satisfied with the information provided before and during the Creditors Meeting, he/she will close the meeting and you will receive your discharge in about 75 or so days.

How much is the filing fee for a Chapter 7 Bankruptcy?

The Bankruptcy Court charges $299.00 to for Chapter 7 Bankruptcy.

How will filing for bankruptcy affect my credit?

Filing for bankruptcy will show up on a debtor’s credit report for several years and will likely make obtaining credit more difficult or expensive, but not impossible.

How many years will a bankruptcy show on my credit report? Will I be able to obtain credit after filing for bankruptcy?

The fact that a debtor filed a bankruptcy petition can remain on the debtor's credit report for ten years under provisions of the Fair Credit Reporting Act, 15 U.S.C. § 1681. If the debtor successfully completes a chapter 13 plan, many credit reporting agencies will report that information for only seven years.

The decision to grant or deny credit in the future is strictly up to each creditor and will vary, depending on the type of credit requested. There is no law to prevent anyone from extending credit to a debtor immediately after the filing of a bankruptcy; nor is there any law that requires a creditor or potential lender to extend credit to a debtor. Usually the first step in rebuilding credit is, ironically, through credit cards. Many banks are willing to extend credit cards to newly discharged Chapter 7 debtors because they are ineligible to seek Chapter 7 protection again for 6 years from the dated of the discharge. For consumers who want to rebuild their credit after a bankruptcy, showing they can be trusted with borrowed money is the first step. Banks who offer credit cards to such consumers will do so with cards that carry higher than market rate and very limited lines of credit or with secured credit cards.