Chapter 7 Bankruptcy: Discharge Debt, Keep Your Dignity
We can help get you back on your financial track
Chapter 7 bankruptcy is a liquidation bankruptcy in which you can legally discharge your obligation to repay nearly all of your debts without any remaining legal ability of your creditors to pursue you for collections after. It’s a good way to walk away from distressed real estate than a short sale or other processes that must be negotiated with creditors.
What You Need to Know About Chapter 7 Bankruptcy in Michigan
Chapter 7 bankruptcy is the form of personal bankruptcy that most people think of when they hear the word “bankruptcy.” It is otherwise known as a “straight” or “liquidation” bankruptcy because, essentially, it accomplishes one very straightforward end: the liquidation of most of your debt.
Although there are some forms of debt that cannot be discharged by a Chapter 7 bankruptcy, a Chapter 7 will otherwise allow you to walk away from unmanageable debt without the need to repay any of it and without the need to fear ongoing collections attempts by your creditors or even taxable liability a result of the discharge of the debt.
A Chapter 7 is typically about a 4-month process that will require you to attend an administrative hearing called a 341 Meeting of Creditors about 30 days after the filing of your bankruptcy petition. The discharge is typically granted 60 days from the date of this 341 Meeting. Under certain circumstances, in complex cases, it is possible for the bankruptcy case to remain open for much longer than this.
One of the most immediate benefits of the Chapter 7 bankruptcy is the “automatic stay against collections,” a master injunction under Federal law that clicks into place the moment that the petition is filed. In other words, you don’t even have to wait until your debts are discharged until you begin to see the effects of the process.
The automatic stay, once in place, will stop garnishments, close lawsuits, stop foreclosure sales, prevent the perfection of liens, require collectors to return repossessed or seized automobiles or other property, and even force garnished bank or wage funds to be returned under some circumstances.
Debt discharged in bankruptcy is a “non-taxable event,” meaning that the creditor cannot mail you a 1099 that you will be responsible for paying taxes on after the discharge.
A discharge of mortgage debt will mean that, even if you decide to continue making your mortgage payments voluntarily after the Chapter 7, you will have the option to stop making the payments and vacate and surrender the property even years after the bankruptcy, without any chance of suffering collection or taxable liability at that point.
A bankruptcy will remain on your credit report for 10 years from the date of filing as a notation in the “public records” section of your report. Thus, after a bankruptcy discharge, you will have to work to repair your credit for some amount of time afterward. However, obtaining new credit is not as difficult as many believe, and a Chapter 7 discharge of debt can drastically alter your debt-to-income ratio for the better, increasing your FICO score under certain circumstances, depending upon the actions you take after your Chapter 7 discharge.
Eligibility for Chapter 7 bankruptcy is initially governed by a formula known as the Chapter 7 Means Test. The Means Test is a mathematical formula that averages the gross income from all household sources (including earnings by other members of the household, even if they are not also filing for bankruptcy) other than Social Security from each of the 6 months before the month in which the bankruptcy is to be filed. That 6-month household average is then compared to the median income in Michigan for a household of that size. If that average household income is higher than the median, a Chapter 7 may not be possible.
However, the Means Test does allow certain deductions to be made from the Means Test average income to reduce a household’s income back under the median to qualify a person for a Chapter 7 who might not otherwise have been.
Attorney John Hilla is experienced in maximizing Chapter 7 eligibility and assisting consumers in passing through the Means Test whenever it is realistically possible and whenever it is in their best interest to be in a Chapter 7. Online “means test calculators” cannot give an accurate picture of Chapter 7 eligibility no matter what they advertise; a determination of true eligibility requires the skill and experience that Attorney John Hilla offers.
The Means Test is not the only test of Chapter 7 eligibility, however. Even if someone passes the Means Test, they may still be ineligible for Chapter 7 based upon considerations of household income vs. household expenses calculated elsewhere in the bankruptcy petition. These other eligibility tests require the expertise of an experienced bankruptcy attorney to determine.
Protection of Your Assets
When you file a bankruptcy petition, you are creating a legal “estate” by automatic operation of law that contains everything you own, every you owe, and everything you may be owed by anyone else. The Bankruptcy Code will allow you to protect a certain amount of personal property, cash, and claims for cash, real estate, and other sorts of assets up to certain dollar-value limits. If you own more property that can be protected with the protections available under The Bankruptcy Code, you may have to surrender it to an individual called the Chapter 7 Trustee in order to have it liquidated for the benefit of your creditors. Or you may have to work out an arrangement to pay the value of the assets to the Chapter 7 Trustee to retain the property.
In most Chapter 7 bankruptcy cases, no personal property will be lost at all. However, not every Chapter 7 can realistically be a “no-asset” Chapter 7, in which the Chapter 7 Trustee liquidates no assets. This is one of the reasons that it is vitally important to retain experienced bankruptcy counsel when considering even what you may believe to be a “simple” Chapter 7 bankruptcy.