.:CHAPTER 7:.

Chapter 7 bankruptcy is commonly known as consumer or personal bankruptcy. The purpose of Chapter 7 is to discharge debts in order to give debtors a " Fresh Start". After October 17, 2005, eligibility to file a Chapter 7 case is determined by a "means test".

What is the Chapter 7 Means Test? The means test is basically a bankruptcy formula used to determine whether you qualify to file Chapter 7 or Chapter 13. Chapter 7 allows you to discharge all of your debts. In Chapter 13 you have to pay back a portion of your debts over three to five years. The means test has two parts. The first part calculates your average gross income for the last six months and compares it to your state's median income. If your income is below the state median income, then the second part of the test does not apply, and you are presumed eligible to file Chapter 7. If, however, your income is above the state median then you have to complete the second part of the means test. The second part of the test subtracts from your monthly income the standard IRS living expenses for a family of your size, plus any secured loan payments you have (e.g. mortgage payments, car payments) and any priority debt payments you owe (e.g. taxes, child support, etc). If the results show that you have enough disposable income left to pay over a period of five years the greater of either *$10,950 or 25% of your unsecured debt, then it is presumed you should be filing Chapter 13 instead of Chapter 7. [*Dollar amount adjusted April 1, 2007. Adjustments every three years on April 1].

Thus, the first question for anyone contemplating bankruptcy is whether their family’s annual income is below Vermont Median Income Standards?  The standards for cases filed after March 15, 2011 are:

 * Add $7,500 for each individual in excess of 4.

If your income is below these levels (and it will for approximately 85% of the people considering bankruptcy) then your case should proceed with relatively little complexity.

If your income is above these levels (the remaining 15% of expected filers) you may still be able to file Chapter 7 but must complete the second part of the means test.

Assuming you need to file a bankruptcy, and you meet the requirements, Chapter 7 is the cheapest, quickest and least burdensome of the three major Chapters (the others being 11 and 13) of bankruptcy law. Chapter 7 allows you to discharge your debts regardless of how many assets you have or how much you owe your creditors.

What are some of the disadvantages?

You are only able to receive a Chapter 7 discharge after eight (8) years have passed since the commencement of the last case in which you received a discharge, although you can file another Chapter 13 case sooner.  Thus, you should not file Chapter 7 if you need the option of doing it again in the next eight years.

If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 petition.  Only under extraordinary circumstances will the Trustee operate a business.

What debts can be discharged?

Most debts are dischargeable in a Chapter 7 case, with several notable exceptions.   Examples of these are alimony and child support obligations, taxes less than three (3) years old, student loans (with the sole exception listed below), and any debts procured by fraud (fraud debts may be dischargeable in a Chapter 13), incurring debt without a reasonably certain ability to repay the debt, and so forth.   A few of the most common or problematic ones are discussed below:

Discharging student loans

**See our comprehensive page on student loans.

Can you be denied a student loan because you or your parents file bankruptcy?

Section 525 of the Bankruptcy Code prohibits discriminatory treatment by any governmental or other student loan program on the basis of filing a bankruptcy.  In other words, a student loan agency cannot deny your loan application based on the filing, by you or anyone you know, of a bankruptcy.  If you would like to read Section 525 for yourself, click here!

Discharging taxes

**See our comprehensive page on discharging taxes.

Tax Liens that have attached to property will survive a bankruptcy.  What does that mean?  It means that the lien will stay against your property regardless of your discharge of the underlying debt.  So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you have the lien removed.

Discharging fraud judgements or debts where fraud may have been involved
Debts that you incurred which were the result of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud. However, the news isn't all bad. These types of debts may be discharged in a Chapter 13.

Can you be fired or denied employment because of a bankrutpcy?
No. While an employer can usually find some reason to fire anyone, they cannot use bankruptcy as a basis for doing so. Again, this is set forth in Section 525 of the Bankruptcy Code. (See above)

Getting rid of other liens, judgements, and mortgage deeds recorded against your property
The bankruptcy code enables a broad range of powers which can enable you to avoid liens that were placed against your home or personal property.  It is too complicated an analysis to deal with here, but if you have liens against your property, make sure to discuss this with your attorney.

Types of liens you may be able to get rid of include judgment liens recorded against your home or specific personal property.  Also, in a Chapter 13 second mortgage against your home may be able to be removed under certain specific circumstances.  This is not an option in a Chapter 7.

What are Preferential Payments?
Payments made to or on behalf of any relatives within twelve (12) months prior to filing your bankruptcy case are recoverable by the Trustee in your case.  That's right.  If you repaid money during that period to your brother, or made payments on a credit card that your mother let you use, they will have to pay back that money to your Trustee who will then distribute it equally to all your creditors.  This is one of the biggest mistakes people make, often innocently because they don't know they will be filing a bankruptcy, but that's the law.  It's designed to prevent debtors from preferring one creditor over another.  The same is true for non-relatives, although the lookback period for them (such as credit cards, etc.) is only ninety (90) days and most people don't really care if their Trustee sues the credit card company to recover the money.

A word about credit cards and cash advances
Any debt aggregating more than $1,150.00 from any single creditor for non-essential,"luxury" goods, or cash advances totaling over $1,150.00 on a credit card, incurred or taken within 60 days prior to filing the bankruptcy, are presumed to be nondischargeable.  The obvious reason for this is to discourage would-be debtors from "running up" their credit charges, then filing bankruptcy. To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it's best not to use them at all).  It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy.  You should consult with your attorney about your personal situation. This particular provision is just a presumption of nondischargeability.  It does not mean that if you wait more than 60 days you are magically free from nondischargeability issues; nor does it mean that if you file the bankruptcy within the 60 days that you won't be able to discharge that debt.  What it basically does is shift the burden of proving that the debt should or shouldn't be discharged onto the debtor during that 60 day period (rather than on the creditor where it would otherwise be).

Paying your taxes with your credit card
Debts incurred on your credit cards to pay taxes to the IRS will usually NOT be dischargeable in chapter 7 but may be dischargeable under Ch. 13.

Reaffirmation Agreements
You may voluntarily repay any debt by signing a Reaffirmation Agreement with the creditor.  Whether this is advisable is a question to be discussed with your attorney. See our comprehensive page on reaffirmation agreements.