Virginia Bankruptcy Lawyers
AN OVERVIEW OF CHAPTER 7 BANKRUPTCY
Many of our clients that are in financial need are resistant to the idea of bankruptcy because of the negative associations that word can carry. But bankruptcy actually has its roots in the Bible, which thousands of years ago recognized that immense debt could be a prison for people, and that occasionally people need a fresh start. Interestingly, Congress, when enacting the U.S. Bankruptcy Code, followed the biblical suggestion of allowing such a fresh start once every seven years. Bankruptcy is therefore not a sign of any failure or misgiving on you personally. Most of our clients end up facing bankruptcy through no fault of their own: an unexpected job loss, medical debts, a small business failure, or a divorce that comes at the wrong time. You don't have to drain your retirement savings and spend decades trying to escape the prison of that debt, the bankruptcy law may give you the legal right to discharge your debts and get the financial fresh start you deserve.
When someone refers to Chapter 7, 11, 12, or 13 when discussing bankruptcy, they are referring to a specific type of bankruptcy proceeding set out in the federal Bankruptcy Code. While there are several kinds of bankruptcies, the two main types of personal bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcies are sometimes called “liquidating” bankruptcies because they require the person filing (the “debtor”) to sell (or “liquidate”) all of his or her nonexempt property to pay off as much of the debt as possible, and then the remaining debt is legally discharged (with some exceptions). However, many clients misunderstand this “liquidation” as meaning that you have to sell the shirt off your back, which is not the case. Virginia law offers exemptions that likely protect most of your possessions. It is only if you have assets of fairly significant value that there is actually any “liquidation” in a Chapter 7 case; in the vast majority of cases, there are no assets to liquidate and the debtor simply receives a discharge of debts.
However, Chapter 7 is not for everyone. You must be “eligible” to qualify for Chapter 7, which generally means that you can't make too much money. Assuming you qualify, the Chapter 7 bankruptcy process is relatively simple and easy, and most case follow the same basic pattern, which is discussed below. In fact, most Chapter 7 debtors never even have to set foot inside a courtroom.
First, you will conduct a consult with a member of our staff who will ask you a series of questions to determine if you are eligible to file a Chapter 7 bankruptcy. If you are eligible, we will provide you a fixed fee pricing quote and begin collecting more documents and information about the details of your financial situation. Our staff will ask you for certain paperwork and financial documents to analyze potential issues in your case and to complete the necessary filing forms. While our staff works complete the necessary paperwork for filing, you will need to be working as well. Specifically, you cannot file a Chapter 7 bankruptcy unless you have completed a credit counseling session with an accredited non-profit credit counseling agency within 180 days prior to filing. This counseling session can usually be completed online or over the phone and once finished, the agency will provide you with a certificate of completion. This certificate of completion is a required form which will be included with the filing paperwork.
Once our firm reviews all of your necessary bankruptcy forms with you, and receives your credit counseling certificate, we will complete the bankruptcy filing with the court. At the moment you file for bankruptcy, you receive an “automatic stay,” Which is a powerful legal tool. Under the automatic stay, you are immediately given reprieve from your creditors, without filing any additional paperwork. This generally prevents debt collectors from harassing you for collections for the remainder of your case. While the bankruptcy is pending, your creditors cannot take further legal action against you, such as putting a lien on your property. The purpose of the automatic stay is to allow you a moment to breathe while you go through the bankruptcy process.
Shortly after the case is filed, the court will send a “341 Notice” to all of the creditors listed in your filing, alerting them to the date of the “Meeting of the Creditors” otherwise known as a “341 Hearing.” Attending this Meeting, and completing the online credit counseling courses, are your main obligations in the bankruptcy process. This Meeting is basically an interview by the Chapter 7 Standing Trustee, who is a government employee hired to help process your case. While the bankruptcy trustee typically works quietly behind the scenes, you'll interact with him or her during this Meeting, when the trustee will ask you questions about your income and expenses, the property you listed in your filing paperwork, and any transaction where you sold or gave away property in the months, or even years before filing. So long as you've been truthful about your assets, income, expenses, and transactions, there is nothing to fear from this meeting. It is very important to know (and our staff will remind you) that once you actually file for bankruptcy, you lose the unilateral right to dispose of your property as you see fit, at least until the trustee has completed his or her review of your case.
At the conclusion of the 341 Hearing, the bankruptcy trustee will determine whether you have any valuable nonexempt property. This is property which is deemed non-essential and may be seized and sold to pay off your outstanding debts. While this may be a scary thought at first, there are broad provisions defining what exempt property you can keep, which protect most or all of the property owned by most of our clients. Moreover, if you don't have a significant amount of nonexempt assets, or they are not worth enough for the trustee to seize and sell, the bankruptcy trustee will likely “abandon” the property to you. Our attorneys will review your paperwork and let you know before the case is filed if there is any property that is at risk for seizure, and if that is the case, we will discuss the risks and proposed strategy. There should not be any surprises about what property is protected unless there is something you fail to tell us about.
Finally, sixty days after the conclusion of the 341 Hearing you will generally receive an order of discharge from the bankruptcy court, which discharges all dischargeable debts (some debts—most taxes and most student loans, for example—cannot be discharged). This timeline may be extended depending on the complexity of your case and/or the amount of property the bankruptcy trustee seeks to sell. Then, so long as you don't receive, or become eligible to receive, an inheritance, lottery or insurance proceeds, or proceeds from a divorce within 180 days after the discharge, you're free to return to your life debt free and enjoy the financial fresh start that the law offers you!
DIFFERENCES BETWEEN CH. 7 AND CH. 13 BANKRUPTCY
You may be wondering, what is the difference between a Chapter 7 and Chapter 13 bankruptcy? While they both have the name “bankruptcy,” they are very different. Chapter 7 bankruptcies are generally reserved for persons with lower annual income. The end goal of a Chapter 7 bankruptcy is to liquidate as much of the debtor's non-exempt property as possible, pay off the outstanding debt, and then discharge whatever debt remains, unpaid. However, as a practical matter, most property is exempt from the liquidation, and most Chapter 7 cases do not involve the sale of any assets. There are some debts that cannot be discharged, such as child support, most tax debts, student loans, or debts incurred through fraud. Once the court-appointed bankruptcy trustee determines if there is any non-exempt property to sell, and sells it to pay some debts, any remaining dischargeable debt will be legally discharged by the court.
In contrast, a Chapter 13 bankruptcy is reserved for higher income individuals where the debt is re-organized, and the debtor must pay back their debts (or a portion of them) over time. Typically, when one files for bankruptcy under Chapter 13, the filing debtor proposes a payment plan to pay off some or all of the outstanding debts over a term of 3-5 years. If approved, the debtor begins making payments to the bankruptcy trustee who then distributes the payments to the various creditors for the life of the payment plan. After that period, if the debtor sticks to the terms of the monthly payment plan, any the remaining dischargeable debt will be released. This is the preferred method if you have a large amount of nonexempt property you don't want to lose to a bankruptcy trustee in a Chapter 7 bankruptcy, or if you have more equity in a piece of property than you can protect with certain bankruptcy exemptions under Chapter 7.
It's important to know both types of bankruptcy because sometimes you may seek to file under Chapter 7, only for the trustee to have it converted into a Chapter 13, thus requiring you to continue to repay many of your outstanding debts. For example, if you file for Chapter 7 bankruptcy but are deemed to have too high an income or fail to meet the “means test” your bankruptcy may be unilaterally converted to a Chapter 13 by the bankruptcy court. Furthermore, you may first think it best to file for Chapter 7 bankruptcy only to realize that you have substantially more nonexempt assets than you first anticipated. Not wanting to lose these items you may yourself choose to convert to a Chapter 13 to save your belongings.