What is Bankruptcy?
People have been having financial problems since money first invented. In the old days, people who didn’t pay their debt were thrown into debtor’s prisons. Our founding fathers were smart enough to realize that there needed to be uniform laws regarding bankruptcy to protect people from aggressive creditor action. In fact, the United States Constitution provides that the United States Congress shall make uniform laws on bankruptcy. Bankruptcy laws are therefore Federal Law and are statutory or written laws codified into the Bankruptcy Code. The code divides the various types of bankruptcy into Chapters. General Motors and Chrysler filed Chapter 11 bankruptcy cases, which generally help businesses reorganize their debt and stay in business. The City of Detroit filed a Chapter 9, which is a bankruptcy for municipalities and allowed them to restructure the city’s debt. Family farmers have their own bankruptcy called Chapter 12. Of the 1 million plus bankruptcy cases filed annually in the United States, the vast majority consists of individual or joint (married couples) Chapter 7 or Chapter 13 cases.
What is a Chapter 7 Bankruptcy?
Chapter 7 is what most people think of when they think of bankruptcy. Your debt is wiped out by order of the bankruptcy court. You never have to pay it back, even if you win the Powerball Lottery down the road. You have to “qualify” with regard to your household income to file a Chapter 7, but for most people who come into my office, this is not a problem. Most of the cases I file and in fact most of the cases filed nationwide are Chapter 7 bankruptcies. Chapter 7 is meant to provide the debtor (person or married couple filing the case) a fresh start by eliminating unsecured debt and allowing the debtors to get out of large contracts such as mortgages and car finance agreements or leases. It is an ideal choice for low to middle income people who have too much credit card debt, medical bills, payday loans, past due utility bills, debts for cars that have been repossessed and have a balance outstanding. If you have a mortgage or car note and you want to walk away from the home or give the car back, this can be accomplished through a Chapter 7 filing.
In technical legal terms, a Chapter 7 is also called a liquidation compared to a Chapter 13, which is also called a reorganization. Liquidation is a scary term. Visions of everything you own being taken and sold right down to your recliner run through your head. Many people think that if they file a bankruptcy, moving men and a big truck pull up to your residence and start loading up your furniture, aquarium and take your dog as well, leaving you standing there with a barrel held by large leather straps because they took all of your clothes too. Nothing could be further from the truth. Yes, Chapter 7 is a liquidation bankruptcy which means that “non-exempt” assets are sold or “liquidated” by a bankruptcy trustee to pay your creditors. In reality, something close to 99% of my cases are in fact, no asset cases, in which absolutely nothing is sold to pay creditors. Remember, the bankruptcy laws are there to provide people with a fresh start preventing the creditors from taking everything you own. My job as your bankruptcy attorney is to use the bankruptcy exemptions to protect your assets while at the same time, working toward the goal of being granted a discharge by the court.
What is the goal of a Chapter 7 Bankruptcy filing?
The primary goal when filing a bankruptcy is to obtain a Discharge order. This is a Federal Court order, signed by a United States Bankruptcy Judge and is mailed to all of your creditors by the bankruptcy court. It basically says that our creditors can never attempt to collect the discharged debt from you, ever. It is very powerful, and carries with it serious sanctions if a creditor intentionally violates this court order. A typical Chapter 7 case that I file has a 100% success rate of obtaining a discharge if my clients follow my simple instructions (e.g. attend your court hearing, provide your tax returns, etc.).
Can all debts be discharged in a Chapter 7?
Most, but not all debts can be discharged in a Chapter 7 bankruptcy. Certain debts however, are automatically not discharged and will survive your bankruptcy case. The most common of these include:
- Child support and alimony
- Recent income taxes (generally taxes that are less than 3 years old)
- Student loans (unless you file a lawsuit during your bankruptcy and prove undue hardship)
- Certain fines or penalties (criminal restitution, traffic tickets, parking tickets, etc.) Driver responsibility fees in Michigan are presently dischargeable.
- Debts for personal injury or death caused by driving while intoxicated
- Debts incurred as a result of fraud.
I’m married. Can I file Chapter 7 alone or must my spouse file with me?
If you are married you have the choice of filing an individual Chapter 7 case or what is called a joint case along with your spouse. Your spouse does not have to file the bankruptcy case with you. I have filed thousands of cases for individual debtors who were married. If there are joint debts however, a joint bankruptcy case should be considered. What’s nice about filing a joint case is that you save money. I generally treat a joint case like an individual case and charge the same fees as does the bankruptcy court in that a married couple only pays one filing fee. A common misconception that many of my clients have is that they believe that if they file individually, that their individual credit card or other debt will automatically become the debt of their non-filing spouse. This is not the case. Your individual debt cannot magically become a joint debt by filing an individual bankruptcy.
Keep in mind however, that if you have joint debt, such as a large credit card balance for which both husband and wife applied, the debt will survive as to the non-filing spouse. Another common misconception is that the debt is wiped out as to all parties who owe the debt such as spouses or other cosigners. The debt will only be wiped out as to the person or persons who actually file the bankruptcy case and proceed to discharge. The discharge order in a Chapter 7 applies only to the debtor who filed. Any other party who co-signed the loan or also signed the application for credit is not affected by the discharge and are still liable for the debt because they did not file. So, if a husband and wife have a large amount of joint debt, the filing of a joint bankruptcy case would probably be the best decision.
How long does a Chapter 7 case last from start to finish?
The typical Chapter 7 case that my office files lasts approximately 4 months from start to finish or closing of the case. A case is commenced when I press a button on my computer that electronically files the case with the United States Bankruptcy Court in Detroit, which covers most of the counties in Southeast Michigan. Within minutes of the filing, a case number is generated. About one month after filing, a court hearing called a “meeting of creditors” will be held which is attended by the debtors and their attorney. This hearing is relatively simple and typically lasts less than five minutes. After the hearing, there is a 60-day waiting period to give creditors a reasonable time in which to object to you getting a bankruptcy discharge, which is very rare. Most of my cases are no asset cases and therefore close within 60 to 90 days after the meeting of creditors.
See also: Bankruptcy FAQ