Chapter 7 Overview

An Overview of What to Expect

Chapter 7 Bankruptcy is often referred to as a "straight" bankruptcy, or a "liquidation".  In Chapter 7, any assets not considered exempt under the law (see next section) are turned over to an administrator (known in bankruptcy as the "Trustee").  The Trustee sells the non-exempt property and distributes the money equally among the unsecured creditors.

In actual practice, however, very few people are required to turn over any property to the Trustee.  In exchange for turning over any property not considered exempt under the law, the Debtor is entitled to a discharge - in other words, is no longer legally obligated to pay unsecured debts (with several exceptions, see Section 2).

On secured debts, the Debtor either "reaffirms" the debt and continues to make payments; "surrenders" the property back to the creditor; or "redeems" the property by making a lump sum payment equivalent to the value of the merchandise to the creditor.

Under the new law, a Debtor must qualify to file a Chapter 7.  This is accomplished through what is called the "Means Test".  This is done by looking at your income received during the six (6) months before the filing of your bankruptcy.  (Example: if filing in January, the "look back period" is July 1 through December 31).  This income is then averaged and annualized (multiplied by 12) to arrive at a projected annual income.  This income is then compared to the median income in your state/county.  If you are below median, then you automatically qualify to file a Chapter 7.  If you are above median, then certain allowed deductions are subtracted from your average monthly income.  At that point, if you have a negative monthly disposable income, or less than $100 of positive income, then you would qualify to file a Chapter 7.  If your monthly disposable income is greater than $100, then you must file a Chapter 13.  As you can see, filing a bankruptcy can be very confusing.  A personal interview is the only way to determine how the law applies to you.

CHAPTER 7 - EXEMPTIONS

Exemptions - Will I Lose Property?

State and Federal laws provide what are called "exemptions".  What this means is that a Debtor is entitled to keep certain property in various categories up to a particular dollar value.  Assets in excess of the exemption levels are considered "non-exempt assets", and they are generally given to the Trustee for sale.  The Debtor has the option of paying the Trustee the amount of money he would have received had property been taken by the Trustee and sold.

In Arkansas, a Debtor can choose between State and Federal exemptions.  The Federal exemptions are the most liberal, with certain exceptions.  For example, the Federal Exemption for residential real property is $20,200 for each debtor in equity (value less mortgages) or $40,400 for a married couple.  If a couple has a home worth $100,000 with a mortgage of $70,000, they would not lose the home because the equity would be $30,000, which is less than the amount of the exemption allowed ($40,400).

On the other hand, if a couple had a home worth $200,000 and a mortgage of $67,000, the amount of the equity ($133,000) would exceed the Federal exemption level by $92,600.  In such a case, the Trustee would have the home sold, pay off the mortgage, give the Debtors their $40,400 exemption and use the remaining funds to pay down the claims of the unsecured creditors.

However, using State exemptions under Arkansas law, a Debtor's homestead is nearly always totally exempt, without regard to value.  During your initial interview, we will determine which exemption scheme you should take; we will go through a checklist of questions to see if there is any realistic possibility of losing any property to the Trustee.

CHAPTER 7 - COURT

Do I Have to Appear in Court?

Yes and no.

Approximately 25 to 40 days after the filing of the petition with the Bankruptcy Court, every debtor must attend a hearing called the "meeting of creditors".  This is a brief hearing (usually about 5 minutes), where the Trustee (a court-appointed administrator for your case) will ask a series of questions almost identical to those we ask during the initial consultation.  While this hearing is not in a courtroom and the Trustee is not a judge, the Debtor should treat this hearing with the seriousness of a court proceeding, because each Debtor is sworn under oath to tell the truth under penalty of perjury, and serious consequences flow from not being truthful.

While each creditor is entitled to attend the meeting of creditors and question the Debtor as they wish, very few (if any) creditors actually appear at the hearing.

CHAPTER 7 - DEBTS

What Kind of Debts Can Be Discharged?

As a general rule, most unsecured debts will be discharged in bankruptcy.  An unsecured debt is a debt where the creditor is not holding any collateral or security to enforce payment of the debt.  The most common examples of unsecured debts are: credit cards/credit lines, medical bills and utility bills.

There are, however, several exceptions to discharge in Chapter 7.  Child support, taxes (that are less than three years old), certain student loans, personal injuries you caused by drunk driving and fines, court costs and court-ordered restitution are never dischargeable in Chapter 7.  The creditor needs to take no action to have the debt declared non-dischargeable.

Several other types of debts are "potentially non-dischargeable".  The creditor must object to the discharge of a debt within a specific time period, or the debt will be declared discharged.  The most common examples of debts in this category include: debts incurred by fraud (NSF checks, major credit card used within one (1) year of filing) and debts incurred by willful and malicious injury (assaults, sale of secured collateral, etc.).

A Debtor has three options on secured debts, those where the creditor is holding collateral to enforce the payment of the debt.  The most common examples of secured debts are: home mortgage loans, auto/truck loans and furniture/electronics/appliance and jewelry accounts.

   1. The Debtor can "reaffirm" the debt, meaning that the Debtor agrees to keep making payments as if there had never been a bankruptcy filing.  The Debtor is then entitled to retain the property.  Sometimes the balance to be reaffirmed can be negotiated with the creditor.  Failure to make payments following the reaffirmation of a debt can result in repossession of the property and the collection of a deficiency judgment;
   2. The Debtor can "redeem" the collateral by making a one-time lump sum payment equivalent to the value of the merchandise.  For example, if a Debtor owes $8,000 on a car that is only worth $6,000, the Debtor can obtain clear title to the car by paying the creditor $6,000.  For obvious reasons, this option is rarely exercised; or
   3. The Debtor can choose to surrender the collateral back to the creditor.  The entire debt will then be discharged, and the creditor cannot collect a deficiency balance following the sale of the item.

CHAPTER 7 - COSTS

How Much Does It Cost to File Chapter 7 Bankruptcy?

Our legal fees for a Chapter 7 Bankruptcy depend on the complexity of the case, but typically run between $1000 and $3,500.  This fee is fairly standard among experienced bankruptcy attorneys in Arkansas.  In addition, there is a court filing fee of $299.  All fees must be paid prior to preparing the bankruptcy petition.