Law Firm of Wendy R Morgan

- Bankruptcy -

Preamble - Chapter 7 - Chapter 13 - Prerequiste

- CHAPTER 7-

   Chapter 7 bankruptcy is to wipe the debt slate clean and to have a fresh start. A person lists all of his debts in a bankruptcy petition which is filed with the U.S. Bankruptcy Clerk. A typical Chapter 7 debtor receives a fresh start in that many of the debts in a Chapter 7 bankruptcy case are eliminated. However, there are exceptions to the above situation. A Chapter 7 is basically for a person who does not have significant assets and who is strapped with an overburdening amount of unsecured debts. Unsecured debts are debts that are not secured by some form of property. These commonly include debts from, medical bills, personal loans, auto deficiencies as a result of a repossessed auto and rental deficiencies, credit cards, other delinquent bills, and the like. Since there is no property or security attached to those debts, the debt is easily eliminated in a Chapter 7 bankruptcy case.

___Debts that are secured by property such as houses and cars are treated differently in a Chapter 7 bankruptcy case. Those debts must continue to be paid if the debtor desires to keep these secured properties. As long as your car and mortgage payments are current, you should be able to make arrangements to reaffirm that secured debt. You can then retain your home, your car, but eliminate your unsecured debt. The debtor can simply continue to make the contracted payment, on time, just as he did before he filed for bankruptcy relief. This act of continuing to pay on a debt is known as reaffirming a debt. By reaffirming on a debt, the debtor re-obligates himself on the loan. Another option would be to surrender the property and eliminate the underlying debt. The third option would be to redeem the property secured by the creditor. The act of redemption involves making a lump sum payment for the market value of the property. Since a debtor rarely has the ability to make such a payment, the redemption option is really not invoked all that often.

    A Chapter 7 bankruptcy, by definition is a liquidation of the personal estate of the debtor(s), not including allowable state law exemptions, and a distribution to creditors, if there are any assets to distribute. Under Illinois state law each debtor has a right to a $15,000.00 exemption in their residential real estate, and a $4,000.00 “wild card” exemption in all personal property. To the extent that a debtor has too much equity in his or her real estate, above the state of Illinois exemptions or the value of the debtor’s assets exceed the Illinois “wild card” exemptions for personal property the debtor will have to have to consider filing a Chapter 13 Reorganization, as further discussed below, or the debtor will have to face potentially having the trustee consider the debtor to have an asset Chapter 7 Bankruptcy estate where the trustee will sell these excess assets and distribute same to creditors.

    A Chapter 7 Bankruptcy may eliminate most kinds of unsecured debts. Some examples of unsecured debts are credit cards; unpaid medical bills; most personal loans; certain judgments; deficiencies on repossessions (vehicles and other property repossessed for lack of payment, which are unsecured debts.

    In many cases the debtors’ personal property and vehicle exemption comes within the $4,000.00 “wild card exemption. The standard of the market value of these personal property items is based upon the realistic and reasonable fair market value one can sell these items based on their age and condition. In many cases the older personal property, appliances, audio visual and furniture and furnishings have little or nominal value.

___Qualifications of a debtor to qualify for the Chapter 7 Bankruptcy and total discharge of the allowable dischargeable debts have changed. The Bankruptcy Code was significantly amended with a general effective date of October 17, 2005. It was Congress' intent to make those who could afford to pay back a portion of their debt ineligible to eliminate their debt in a Chapter 7 bankruptcy. This intent is being carried out by the advent of the "means test". This test can be invoked by any creditor, the trustee, the court or the U.S. Trustee.

    To determine if a debtor can afford to pay back a portion of his debts, there is a complicated mathematical equation which the attorneys will have to perform. The debtor(s) annual income is one of the main factors utilized to determine whether the debtor (s) can pass this test. However, other factors (i.e. number of children/dependants), may mitigate the debtor (s) income and enable a debtor(s) to qualify under the “means test” even if their total income would not otherwise allow for same. The income level in itself is not prohibitive for many debtors and often a debtor earning even as much as a $60,000.00 annual yearly level of income can qualify on the basis of income alone without resort to other mitigating factors.

___Under the current law, a debtor can only receive a discharge once every eight years. Once a case is filed, an impartial case trustee is appointed by the office of the United States Trustee. Your case will be scheduled for a first meeting of creditors and you and your attorneys will receive notice of that meeting. It is mandatory that the debtors attend this meeting. The location will depend on which county the case is filed. (I.e. If the case is filed in Cook County, the meeting will be downtown Chicago. If the case is filed in Dosage County, the meeting will be in Wheaton and for Lake County; the meeting will be in Waukegan.) The primary function of the Chapter 7 trustee is to administer the case, determine if there are any assets to liquidate and liquidate your non-exempt assets. In most cases, your assets are completely exempt and there is no property for the trustee to administer. If there does appear to be an asset, creditors will be given the opportunity to file their required proof of claims so that they can be part of any distribution. The trustee will liquidate your non-exempt assets in a manner that maximizes the return to your unsecured creditors. The trustee can also pursue causes of action that you may have at the time your bankruptcy case is filed. A common cause of action is one to recover money or property that is owed to you. The trustee also has strong avoiding.powers. This allows a trustee to set aside preferential transfers made to creditors prior to your bankruptcy filing. This avoiding power may result in proceeds being distributed to unsecured creditors.In addition to liquidating any non-exempt assets, the trustee has the duty of making sure that you have complied with the numerous bankruptcy laws that are enumerated throughout the Bankruptcy Code. The trustee is mostly interested in what property you own, whether it can be exempted under the Federal or State laws and whether or not it can be administered for the benefit of creditors. The trustee has a vested interest in the property because he is partially paid on commission. The trustee may receive 25% of the first $5,000.00 administered, 10% of any amount between $5,000.00 and $50,000.00, and 5% of any additional amounts administered. Most debtors can protect the majority, if not all of their property. What little that cannot be protected is often overlooked by the trustee as just too burdensome to administer for a very little distribution to creditors.The trustee will review the petition and schedules that you filed as part of your bankruptcy case. He will look for the documents to be in good order, accurate and without omissions. He will review the exemptions to see if there is any property that can be administered. He will check your statement of intentions with regard to secured property and to leases. At the meeting of creditors, the trustee will investigate your financial affairs.If there is going to be a distribution, he will examine the proofs of claim filed by creditors.

___After your case is filed and prior to your discharge order being entered, creditors have an opportunity to object. Provided that no one objects to your bankruptcy discharge within the deadline set by the Clerk of the U.S. Bankruptcy Court, and the trustee is satisfied the debtor(s) have complied with all other requirements, the trustee will approve you for a discharge. You will have to attend the discharge hearing if you are reaffirming a secured debt and the creditor requires your attendance. Your attorney will advise you in that event. Otherwise, once you are approved for discharge, the Federal Court processes this approval and there will be a discharge date and discharge order provided. If there are no assets for the trustee to administer then your case is completed. The entering of the discharge order is the final process that will occur in your bankruptcy case.

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