The essential goal of the federal bankruptcy laws is to give a debtor a financial "fresh start" from burdensome debts. By filing for chapter 7 bankruptcy relief, a debtor seeks a discharge, which releases the debtor from personal liability from debts and prohibits creditors from collecting or attempting to collect discharged debt.
Individuals seek a bankruptcy discharge for many reasons, most common being credit card debt, personal loans, mortgage loans, auto loans, medical bills, most injury claims. Also, the mere filing of a bankruptcy case stops lawsuits, wage garnishments, and foreclosure.
The bankruptcy process is complex and involves legal concepts such as the "automatic stay," "exemptions," "means test," and "discharge".
Filing a petition under chapter 7 of the Bankruptcy Code creates an automatic stay (a stop) on most collection actions against the debtor and the debtor's property. During the period of the automatic stay, creditors may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments.
The Bankruptcy Code allows an individual debtor to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor's home state. A Chapter 7 bankruptcy allows a debtor to retain exempt assets, such as furniture, clothing, tools of the trade, retirement accounts, most vehicles and real estate, as long as their equity does not exceed the exemption amounts. The maze of federal and state exemptions is complex. It is important to accurately value the debtor's assets and to correctly apply exemptions to avoid surrendering property to the bankruptcy estate.
The Bankruptcy Code requires the application of a "means test" to determine whether an individual consumer debtor qualifies for a bankruptcy discharge under chapter 7. If a debtor's income is in excess of the current median income for debtor's household size, as provided for in published means test tables, the debtor may not be eligible for a chapter 7 bankruptcy discharge.
A chapter 7 case begins with an experienced bankruptcy attorney reviewing the debtor's financial information, such as tax returns, pay advices, financial accounts, valuation of assets, credit history, types of debt and debtor's financial affairs in the past several years. The attorney then advises the debtor whether seeking chapter 7 bankruptcy relief is feasible. The attorney informs of problematic areas, if any. If the individual chooses to proceed with seeking chapter 7 bankruptcy, the attorney prepares the necessary paperwork after gathering debtor's information. The debtor must complete a mandatory credit counseling requirement course, available online. After the debtor reviews all of the necessary paperwork, signs it, and obtains a certificate of completion of credit counseling, the attorney will file a chapter 7 bankruptcy petition, schedules of assets and liabilities, list of exemptions, means test analysis, a schedule of current income and expenses, a statement of financial affairs. Debtors must also provide the assigned case trustee with a copy of the tax return for the most recent tax year and evidence of payment from employers, if any, received 60 days before filing. A husband and wife may file a joint petition or individual petitions.
The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. In most jurisdictions, if a debt is not listed in the bankruptcy schedules, it will not be discharged. The debtor may amend the petition and the schedules to include inadvertently omitted pre-petition debt.
Within 30 to 60 days after the filing of the case, the bankruptcy trustee will hold a creditors' meeting, where the trustee will examine the debtor under oath. The trustee usually makes a finding of "no assets" and in most circumstances, the debtor receives a discharge 60 days after the creditors' meeting.
A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. The debtor is not legally required to pay any debts that are discharged. The discharge is a permanent injunction (order) prohibiting creditors from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls and letters.
The court may deny an individual debtor's discharge in a chapter 7 case if the debtor fails to complete an instructional course concerning financial management. This is a separate course from the pre-filing credit counseling requirement, and is known as a "pre-discharge debtor education course."
Not all debts are discharged. The Bankruptcy Code excepts certain debts from the discharge, the most common types being certain types of tax claims, debts not listed in the bankruptcy schedules, debts for spousal maintenance or child support, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties (parking tickets, red light tickets, tollway violations), debts for most student loans, debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated, and certain homeowners' association dues.
The bankruptcy discharge creates a permanent statutory injunction prohibiting creditors from taking any action to collect a discharged debt. A creditor can be sanctioned by the court for violating the discharge injunction.
The Bankruptcy Code is complex and a chapter 7 bankruptcy discharge is subject to many exceptions. Before filing for bankruptcy relief, consult Igor Gromov, an experienced bankruptcy attorney who has handled a wide variety of bankruptcy cases and who is familiar with the different situations and difficulties that may arise along the way.
Contact Gromov Law Offices at (847) 845-1779 for a free bankruptcy consultation and bankruptcy case evaluation.