The word “bankruptcy” may conjure images in your mind of auctioneers selling all your property, save for the clothes on your back. Or you might wonder what the community will think. Will friends and family shun you on the street?
The reality is that Chapter 7 bankruptcy isn’t anything like that. The three most common reasons that people file bankruptcy are divorce, job loss, and medical bills. With spiraling health care costs and the recent economic crisis, more and more people have found themselves in bankruptcy. It is very likely that you have friends, family or co-workers who have gone through bankruptcy and that you never heard a word about it.
So how does a Chapter 7 bankruptcy work? We ask our clients to come in for an initial meeting where we review all their debts and credit report and discuss their income and expenses. After this initial evaluation we talk about whether they would qualify for Chapter 7 (this will depend on income, family size, etc. though most folks who come see us do qualify). Next, we discuss whether their debts would be dischargeable. Taxes can be dischargeable, but only if they’re old enough. Student loans and alimony/child support are generally not dischargeable. Credit cards and other unsecured consumer debts like medical bills can be wiped out.
If the client qualifies for Chapter 7, we discuss the ramifications of bankruptcy. It may be more difficult to get a mortgage for the next few years and any car loan you take out will likely be at a higher interest rate than someone who hadn’t filed might qualify for, but in general, you can overcome these disadvantages by building credit after bankruptcy. Job seekers and people who might be looking to rent an apartment should know that only a very small percentage of employers and landlords will run credit checks and frown on bankruptcy.
Next, the conversation turns to assets. People want to know what property they can keep in a bankruptcy. The short answer is that you would only have to surrender property which is not “exempt.” The bankruptcy code is full of exemptions. Your clothes, furniture, household goods are safe unless you’re Imelda Marcos or something. You can generally keep your house and car, though some people use bankruptcy to get rid of houses or cars that are worth significantly less than is owed on them.
The Process: If a client decides to file, we spend the next couple weeks assembling all the required paperwork and filling out schedules. When that is complete we file the case with the court. This filing begins what is called the “automatic stay.” During the automatic stay no creditors can contact the client, either by telephone or by mail. If they do, we may be able to sue them and collect damages for the client.
Approximately one month after filing, the client will have a meeting with a bankruptcy trustee. This is called a 341 meeting. It consists of the client, the lawyer, and the trustee. It is the trustee’s opportunity to make sure that the client isn’t hiding assets anywhere and that the bankruptcy filing is accurate. It usually takes less than five minutes.
About sixty days after the 341 hearing, if all goes well, the bankruptcy is confirmed and all the client’s unsecured debts are eliminated. This means that the creditors can never attempt to collect the debts again. The client has a fresh start and all is beautiful with the world.