What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy is the Most Common Form of Bankruptcy

Most people, as much as 80% of people that file bankruptcy, will be filing a Chapter 7 Bankruptcy.  This is because the Bankruptcy Code states that only a person that has below median income can file for Chapter 7 Bankruptcy.  This means that 50% of Arizonans can automatically file for Chapter 7 and, if you qualify, there needs to be a good reason to do a Chapter 13 Bankruptcy or a Chapter 11 bankruptcy.

What Debts Are Included in Chapter 7?

Typical Debts

Essentially every debt will be discharged in a Chapter 7 bankruptcy.  This includes most unsecured consumer debts such as medical bills, utility bills, back rent (but you still might be evicted if you aren’t current on your rent), personal loans, government benefit overpayments, and credit card charges.

Lawsuit Judgments

Money judgments are almost always dischargeable, with a few exceptions (discussed in Debts That Survive Chapter 7 Bankruptcy.)

There is an exception to discharge if the money, property, or services were obtained under false pretenses. The false pretense must have been made in writing to the creditor and the misrepresentation must have been material, which means the representation was such that the creditor would not have extended credit had the true facts been known. For example, if you overstated your income on a loan application, the overstatement would be material if it was necessary to reach the minimum to qualify for the loan; it would not be material if your true income was sufficient to qualify without the overstatement.

Secured Debts if You Surrender the Property

Any secured may be discharged provided that you return the property securing the debt to the creditor.

If you don’t want or need the secured property, it can be to your advantage to let the creditor take it back. To do this, indicate on the “Statement of Intentions” form that you will surrender the property and make it available for the creditor to pick up. You don’t have to deliver the property to the creditor but you must cooperate with the creditor’s repossession. Sometimes creditors will not bother to repossess small items because it is not worth the expense for them to pick up the item.

Secured Debts if the Creditor Did Not Properly Take a Security Interest in the Property

You may also be able to discharge a secured loan if the creditor failed to properly take a security interest in the property. An example would be where a car dealer forgot to place a lien on your car and the value of your car is within the exemption for motor vehicles. This would mean the dealer’s claim is unsecured and you can keep the car as exempt property.

Income Tax Debts

Income taxes may be discharged if:

  • the tax return was filed more than two years before you filed your bankruptcy petition
  • there was no fraud or tax evasion involved
  • the taxes were first due at least three years before the bankruptcy petition was filed, and
  • tax liability was assessed more than 240 days before you filed bankruptcy.

Beware Debts Acquired Close to the Filing Date

In some cases, an otherwise dischargeable debt might not be discharged in Chapter 7 if you incurred it close in time to your bankruptcy filing. Here are the rules:

Debts incurred within 90 days of your bankruptcy filing that were for the purchase of luxury goods or services owed to a single creditor may be nondischargeable. The same goes for cash advances that made within 70 days of your filing.

Here the debts are presumed to have been incurred in anticipation of bankruptcy and that you had no intent to repay them. You can try to rebut the presumption by making a motion to the court. Of course, making the motion and attending a hearing on the issue can be expensive and time-consuming. If at all possible, you should postpone signing and filing your bankruptcy petition until any such purchases or cash advances are outside the 70- or 90-day window.

A creditor may claim that such debts are nondischargable even beyond the 70- or 90-day window. However, in this case, the creditor must make a motion to the court and prove that you incurred the debt in anticipation of filing bankruptcy. Going on a spending spree or taking out cash advances after consulting a bankruptcy attorney might be evidence that you did not intend to repay the debt.

Debts Not Included in Bankruptcy

Some types of debts are deemed nondischargeable if they fall within one of a list of prescribed categories. Debts falling in one of these categories do not require a court hearing to determine dischargeability status.

Unless the debtor can demonstrate extraordinary circumstances to override public policy, the following debts are deemed automatically nondischargeable:

  • unscheduled debts (any debts the debtor fails to list on the bankruptcy petition or include on the mailing list), unless the creditor had actual notice or knowledge of the bankruptcy filing. Also, many jurisdictions allow discharge of otherwise dischargeable debts not listed in the petition due to an innocent mistake when there are no assets to distribute.
  • certain taxes (See above)
  • debts for spousal or child support or alimony
  • debts owed to a former spouse or child if they arose out of a divorce or separation
  • debts to government agencies for fines and penalties
  • student loans (with a few rare exceptions)
  • debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated
  • debts owed to certain tax-advantaged retirement plans
  • debts for certain condominium or cooperative housing fees (such as homeowners association fees)
  • attorney fees in child custody and support cases, and
  • court fines and penalties, including criminal restitution.

Concerned about filing? Check out this great article by my friend, Casey Yontz: