Are you wondering about Chapter 7 bankruptcy? Contact our experienced bankruptcy attorneys in Arizona for more information regarding filing Chapter 7.
Chapter 7 bankruptcy can be a fresh start for anyone because it eliminates unsecured debt. According to the Bankruptcy Code, both individuals and businesses can file under this Chapter.
Unlike Chapter 13 bankruptcy, Chapter 7 does not involve a repayment plan tailored to reorganizing your debts and halting a foreclosure.1 Instead, Chapter 7 bankruptcy is designed to eliminate unsecured debt.
Each bankruptcy is different depending on your circumstances. You should consult a local Tucson bankruptcy attorney to see how whether Chapter 7 bankruptcy applies to your individual situation and how to proceed if it does.
Chapter 7 Bankruptcy for Individuals
For individuals, unsecured debt can include credit card charges, medical bills, money owed under lease agreements, business debts, payday loans, certain tax debt, utility bills, and more.2 However, some debt such as student loans, loans you owe to a pension plan, and debt related to child support, alimony, or domestic obligations may not be discharged.3
Consult a local Tucson attorney to determine which assets are protected under Chapter 7 and how to proceed for assets that are not protected.
Requirements for Filing
The Means Test: In order to qualify for Chapter 7 bankruptcy, you must pass something called the “Means Test.” The Means Test takes a variety of factors such as non-consumer debts and gross wages to determine whether your income is low enough to qualify for Chapter 7.4 The test is a formula that uses income and expense information, as determined by IRS guidelines, to see if you have enough money to make minimum payments under a Chapter 13 bankruptcy plan.5 Therefore, if you fail the Means Test, you may be able to use Chapter 13 bankruptcy to repay some or all your unsecured debt instead of Chapter 7.
Credit Counseling: To file a Chapter 7 bankruptcy you have to finish credit counseling within six months of filing. This differs from debtor education, which must be completed after a bankruptcy petition is filed and a discharge is potentially issued.6 The credit counseling class is usually taken by phone or online with an approved Credit Counseling Agency. In certain limited circumstances, such as incapacity because of mental illness, the credit counseling requirement may be waived.7
Forms and Fees: You are required to file a number of forms with the court, such as the Petitions, Schedules, and Statements. These forms require you to disclose all your assets, debt, income, expenses, and any transfers you made within the two years prior to filing. In addition, your paperwork also lists your means test calculations and the exemptions that protect your property.8
The current filing fee for Chapter 7 bankruptcy is $306.9 In Arizona there are varying fees for each form ranging from for converting a bankruptcy to a different chapter to the simple act of filing and indexing a bankruptcy petition.10 There are applications for fee waivers available for individuals filing under Chapter 7 as long as your total combined monthly income qualifies.11
Previous Bankruptcy Filing: You may also be precluded from filing a Chapter 7 bankruptcy if you already received a discharge within the last six to eight years, depending on which type of bankruptcy you previously filed.12
What Happens When You File
Automatic Stay: The automatic stay applies after you have filed paperwork with the bankruptcy court and it will stop a foreclosure proceeding.13 The stay also protects you from creditors trying to collect debt you owe them. For example, if a creditor has garnished your wages or put a hold on your bank account, these actions must cease once your case is filed. However, creditors can “lift” the bankruptcy stay and remove the protection in certain situations by filing a Motion for Relief from the Automatic Stay.14
Length of Time: The Chapter 7 bankruptcy can take about four to six months depending on which county in Arizona you reside in. For example, both Pima and Pinal counties normally discharge closer to six months after filing.
Bankruptcy Trustee: Chapter 7 of the Bankruptcy Code is referred to as the liquidation chapter because it is the bankruptcy trustee’s sole role to sell your non-exempt assets and pay your creditors with the proceeds. The bankruptcy trustee is a person appointed by the court whose role is to ensure your creditors are paid as much of your debt owed as possible. The trustee is compensated based on the amount recovered for your creditors. The bankruptcy trustee executes his or her role by examining the bankruptcy documents in order to verify accuracy and determine whether there are nonexempt assets to be sold to benefit your creditors. The trustee will also determine whether there were any financial transactions in the period prior to filing that should be reversed. With most Chapter 7 bankruptcy cases, the trustee does not sell your assets because they are either protected under the bankruptcy exemptions or are of little value.
State Exemptions: Although the bankruptcy trustee’s role is to sell non-exempt assets to pay creditors, most assets or property is protected by applicable state exemptions. For example, in Arizona there is a homestead exemption that allows up to $150,000 equity in your home. In addition, Arizona allows sales proceeds to be exempt 18 months after sale or until a new home is purchased.15 In Arizona, you can also use some federal exemptions such as social security survivorship benefits in addition to Arizona exemptions.16
Formalities After Filing
Meeting of Creditors: About a week or two after you file, you will receive notice of the 341 Meeting of Creditors.17 The 341 Meeting of Creditors is a hearing before the bankruptcy trustee where you are sworn in and asked a series of questions about the bankruptcy papers you filed with the court. For example, the trustee will ask whether you previously filed for bankruptcy or whether you have a domestic support obligation.18 While your creditors are able to attend and question you at the hearing, they normally do not show up. As with most Chapter 7 bankruptcies, the Meeting of Creditors is the only appearance you will have to make.
Discharge: The discharge occurs at the end of your bankruptcy case and is when all the debt that can be eliminated in your bankruptcy has been wiped out. However, not all debts are dischargeable. Student loan debt, some tax debt, and child support or alimony are some examples of debt that cannot be discharged.
Chapter 7 Bankruptcy for Businesses
In certain circumstances, special Chapter 7 bankruptcy procedures apply to business entities such as LLCs or Corporations.19 In this situation, the bankruptcy trustee will liquidate the business and settle its debts.20 A Chapter 7 bankruptcy for businesses can vary based on business structure. For example, as a sole proprietor it may wipe out certain personal and business debt.21 You should consult a local Tucson attorney to see how Chapter 7 bankruptcy affects your specific business form.
 Bankruptcy: How To File Chapter 7 & 13, Totalbankruptcy.com, http://www.totalbankruptcy.com/default.aspx?GCID=x001&keywordid=TBK_G_S_Dynamic&creativeid=19717907883&adposition=1t3&placement=http%3a%2f%2fwww.totalbankruptcy.com%2fstate-laws%2farizona%2fdefault.aspx&gclid=CJ7ltoztprwCFdKIfgod5DgAcg (last visited Feb. 1, 2014).
2 See chapter 19 of the Bankruptcy Code. Mher Asatryan, Which Debts Are Discharged In Chapter 7 Bankruptcy?, Nolo.com, http://www.nolo.com/legal-encyclopedia/debt-discharged-chapter-7-bankruptcy.html (last visited Feb. 1, 2014).
3 Kathleen Michon, Which Business Debts Are Discharged In Chapter 7 Bankruptcy?, Nolo.com, http://www.nolo.com/legal-encyclopedia/business-debts-discharged-chapter-7-bankruptcy-32415.html (last visited Feb. 1, 2014).
4 Statement of the U.S. Trustee Program’s Position on Legal Issues Arising Under the Chapter 7 Means Test, Justice.gov, http://www.justice.gov/ust/eo/bapcpa/docs/ch7_line_by_line.pdf (last visited Feb. 1, 2014).
5 Kevin Chern, The Bankrupcy Means Test: Who Can File?, Totalbankruptcy.com, http://www.totalbankruptcy.com/chapter-7/requirements/means-test.aspx#means-test (last visited Feb. 1, 2014).
6 Credit Counseling and Debtor Education Requirements, Hib.USCourts.Gov (Dec. 2010), http://www.hib.uscourts.gov/forms/packages/CreditCounselingDebtorEd.pdf.
8 Kathleen Michon, Forms You Must File in Chapter 7 Bankruptcy, http://www.nolo.com/legal-encyclopedia/forms-you-must-file-chapter-7-bankruptcy.html (last visited Feb. 1, 2014).
9 Official Form 3B, USCourts.Gov (Dec. 1, 2013), http://www.uscourts.gov/uscourts/FormsAndFees/Forms/Bankruptcy/B_3B_Instructions.pdf.
10 Filing Fees, azb.USCourts.Gov, http://www.azb.uscourts.gov/default.aspx?PID=97 (last visited Feb. 1, 2014).
11 Official Form 3B, supra note 9.
12 Kathleen Michon, A Chapter 7 Bankruptcy Overview, Nolo.com, http://www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-overview-29571.html (last visited Feb. 1, 2014).
13 Arizona Bankruptcy Process, Arizonabankruptcylaw.com, http://www.arizonabankruptcylaw.com/process.html (last visited Feb. 1, 2014).
14 United States Bankruptcy Court District of Arizona: How to File a Motion for Relief From Automatic Stay, azb.uscourts.gov, http://www.azb.uscourts.gov/documents/relief_from_stay_manual.pdf (last visited Feb. 1, 2014).
15 Arizona Bankruptcy Exemptions, Arizonabankruptcylaw.com, http://www.arizonabankruptcylaw.com/exemptions.html (last visited Feb. 1, 2014).
17 A Chapter 7 Bankruptcy Overview, supra note 12.
18 Section 341(a) Meeting of Creditors Required Statements/Questions, Justice.gov, http://www.justice.gov/ust/eo/private_trustee/library/chapter07/docs/ch7hb2012/Section_341(a)_Meeting_Questions.pdf (last visited Feb. 1, 2014).
19 Kathleen Michon, Which Business Debts Are Discharged In Chapter 7 Bankruptcy?, Nolo.com, http://www.nolo.com/legal-encyclopedia/business-debts-discharged-chapter-7-bankruptcy-32415.html (last visited Feb. 1, 2014).
21 Chapter 7 Bankruptcy for Small Businesses, Nolo.com, https://www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-small-businesses (last visited Feb. 1, 2014).