Did you know that there are several different types of bankruptcy? Contrary to common belief, there are actually many different options to choose when considering bankruptcy. The two most common types of consumer bankruptcy are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. While they are both part of the United States bankruptcy code, they are very different processes that achieve the goals of debt relief and credit repair in very different ways.

In this blog, we will discuss what a Chapter 7 bankruptcy is and under what circumstances a person should file Chapter 7 bankruptcy. We will discuss Chapter 13 bankruptcy in another blog, as well as whether a person should file bankruptcy at all.

What is Chapter 7?

There are several key differences between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. It is important to know how each chapter works so that you will know which one you need to file. Bankruptcy rules and procedures vary, so, depending on the circumstances of your household, it is important to know how a specific bankruptcy will affect you and which one may benefit you most.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) was adopted by Congress in 2005. This Act made significant changes to the U.S. Bankruptcy Code, which set the laws on who may qualify to file a Chapter 7 or be eligible to file Chapter 7. This Act also made it possible for a person, or married couple, to file a Chapter 13 if they do not qualify for a Chapter 7.

Chapter 7 is most like the idea that people have in their minds when they think of bankruptcy. Chapter 7 also seems to be the most popular bankruptcy among individuals and families. Often referred to as “straight bankruptcy” or “liquidation”, there are some major pros to Chapter 7 bankruptcy. Chapter 7 cases can be fast – Chapter 7 often takes about 90 days to complete start to finish; however, it can take up to six months in uncommon cases. Chapter 7 is less expensive than Chapter 13. Chapter 7 may also make instant credit repair once the Order of Discharge (the Federal Court Order that wipes out most debts) is signed by the judge. A Chapter 7 Bankruptcy can quickly get rid of unsecured debts (credit cards, medical debts, judgments), immediately stop a garnishment, and even raise your credit score, while keeping your home, car, and other miscellaneous personal items. A good bankruptcy attorney will be able to make sure that you will be able to keep your home, keep your car, and keep your property through a Chapter 7 bankruptcy.

There are important factors surrounding your income, assets, and financial dealings, to consider before filing. This is some of the most important work a bankruptcy attorney at ARlaw Partners will do and it is important to be forthcoming during the free consultation and intake phase of talking with your attorney in order to make sure that property is protected during bankruptcy.

The first step is to first determine whether you qualify to file a Chapter 7 which will depend on your income (both your current income and your income for the 6 months prior to filing) and whether you have filed previously filed a bankruptcy case and received an Order of Discharge.

The next step is to consider any money, property, transfers of property, gifts to a third party, inheritances, lawsuits in which you are a Plaintiff that started before you considered filing Chapter 7 and determine whether a Chapter 7 Trustee has rights to gain control of those things. This is another area where your ARlaw Partners lawyer will be able to look at the facts of your case and let you know what to expect before filing bankruptcy.

To determine whether you qualify to file a Chapter 7 bankruptcy and what impacts a Chapter 7 bankruptcy may have on you, we will consider the following guidelines.

1. Have you filed bankruptcy before?

   If you have received a discharge in a bankruptcy case before, whether from a Chapter 13 or a Chapter 7, you may not be eligible for another discharge in a Chapter 7 case for a certain amount of time. The rules on the length of time before filings differ depending on whether you filed a Chapter 7, Chapter 13, or other chapter before. It is important to discuss this with an attorney before filing to make sure you will be able to get a discharge.

1. Are you above or below the household median income for your state?

   You will want to look at the IRS figured median household incomes for your state, as they differ across the nation. In Arkansas, the current median household income for an individual is $46,120.00 and for a family of four is around $67,349.00. These values are updated from time to time. If you are above the median household income, your attorney may still be able to get you qualified for a Chapter 7 based on applicable living expenses. If you do not qualify for a Chapter 7 because your income is too high, you can still file a Chapter 13.

1. Do you own any assets that may be sold by a Chapter 7 Trustee?

   A Chapter 7 Trustee is in the business of looking for assets she or he can legally take and that can be sold at auction so the proceeds can be distributed to creditors. The Trustee earns a percentage of these sales, so the Trustee wants to find any property that cannot be protected by the Bankruptcy Code. Generally, a person’s primary home used a residence and a car for each filing individual may be protected. At ARlaw Partners, we make sure that all property you disclose to us can be protected and kept through your Chapter 7 before ever filing your case. If we think that you might not be able to keep something through your Chapter 7, we will discuss that with you before filing your case. You will want to discuss this in depth with an attorney to make sure your home or car is out of reach of Chapter 7 Trustee.

1. Have you sold or transferred or given any money or property to another person, group, organization within the last 3 years?

   Again, the Chapter 7 Trustee is in the business of trying to find any assets or money that can be used to pay creditors. If a substantial amount of money or property has been given away or sold within the last 3 years, the Chapter 7 Trustee may reverse this transfer. For example, say a person with no income and no assets files a Chapter 7 case. This person sold her only car 2 years ago to a stranger. She received $10,000.00 for the sale of the car. She sent $4,000.00 of the money from the sale to a local foodbank charity and used the remaining $6,000.00 for living expenses over the course of a year. A Chapter 7 Trustee may demand that the local foodbank charity, importantly not the person that sold the car, return the $4,000.00 to the Trustee. Trustee then pays the $4,000.00 to Individual’s creditors, after taking a percentage as the Trustee’s fee.

1. Have you recently received an inheritance?

   A Chapter 7 Trustee may come after any inheritance you received prior to filing, or that you may receive 6 months after you file. The inheritance is used to pay creditors, after the Trustee takes its percentage. Any remaining funds would be returned to you.

1. Are you a party to a lawsuit in which you were injured and may receive funds from a personal injury settlement or judgment?

   If you have the right to sue some third party for monetary damages, the Chapter 7 Trustee can essentially step into the shoes of an person who files Chapter 7 and will have rights to any funds from a personal injury settlement or judgment. You will not have to bear any of the cost of the suit. Again, these funds are used to pay creditors, and the Trustee earns a percentage as a Trustee fee.

Whether to file Chapter 7 is an important decision, and one that is best made alongside a well-experienced bankruptcy attorney who understands all the nuances of the Bankruptcy Code and the case law relevant to a particular state. Chapter 7 can have positive impacts to you financially, allowing you and your family a clean, fresh start and a less stressful financial future; however, if your current and past financial history is not considered carefully, Chapter 7 can be a long and negative experience. At ARlaw Partners, we will work through your information prior to filing in order to make sure that you have all the information needed to make the best decision for you and yours.