Debtors' Rights Under Chapter 7

• What Is Chapter 7?
  
• What Are The Disadvantages?
  
• How Will a Bankruptcy Affect My Credit Rating?
  
• What About Future Credit?
  
• Does A Chapter 7 Bankruptcy Stop Creditor Actions and Collections Such As Garnishments?
  
• Exemptions - How Much Property Can I Keep?
  
• Turnover - Will I Lose Any Property?
  
• Are There Exceptions To Discharge?
  
• Are Co-Debtors or Co-Signers Discharged From Their Debts If I File Bankruptcy?
  
• Can I Repay Some Of My Creditors?
  
• Is Property I Obtain After Discharge Affected?
  
• Will I Have To Go To Court?
  
• How Long Will The Bankruptcy Take?

What Is Chapter 7?

A Chapter 7 bankruptcy is commonly referred to as a fresh start bankruptcy. When you file a Chapter 7 bankruptcy, you generally discharge all debts. A discharge extinguishes your legal obligation to pay the debt. When a lien exists against your property, you generally have three choices: (1) surrender the property and discharge the debt; (2) reaffirm your obligation to the creditor and continue to make regular payments; or (3) redeem the property by paying its cash value and discharge the balance of the debt.

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What Are The Disadvantages?

The major disadvantage is that you cannot file another Chapter 7 for a period of eight years from the date of your filing. Obviously it is not a good thing to have on your credit report, however, there is no prohibition about obtaining credit any time after filing for Chapter 7 relief.

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How Will a Bankruptcy Affect My Credit Rating?

A bankruptcy can remain on your credit rating for up to ten years from the date of filing.

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What About Future Credit?

Obviously, a Chapter 7 bankruptcy is not a good entry to have on your credit record. However, many people who file a Chapter 7 do obtain credit after their discharge. Creditors look at many things when determining whether to issue you credit, such as the amount of your indebtedness, your income and your ability to repay. A Chapter 7 may actually improve your chances of obtaining credit because your discharge eliminates your debt load and creditors know that you cannot file another Chapter 7 bankruptcy for at least eight years.

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Does A Chapter 7 Bankruptcy Stop Creditor Actions and Collections Such As Garnishments?

Yes. When a Chapter 7 bankruptcy is filed, an “automatic stay” goes into effect, which prohibits creditors from engaging in any action toward the collection of their debt. This means that court actions, foreclosures and garnishments stop. Creditors are prohibited from even contacting you.

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Exemptions - How Much Property Can I Keep?

Debtors are permitted to keep a certain amount of property. The exact amount of property you can keep will depend upon the amount and type of property you own. For example, a married couple who own a home together can keep in excess of $36,000 in equity in their home, $18,000 in household goods, personal belongings and clothing, $2,400 in jewelry and other assets. In Michigan, you have a choice of using exemptions granted by federal or state law. Your assets and exemption limits should be carefully assessed by an attorney.

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Turnover - Will I Lose Any Property?

If you own property which is worth more than you are allowed to exempt, the property may be turned over to the bankruptcy Trustee, who will sell it to pay off your creditors. If you possess non-exempt assets, a Chapter 13 may be better suited to your needs.

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Are There Exceptions To Discharge?

Yes. Certain types of debts are not dischargeable. Debts incurred by larceny, embezzlement,: fraud, and willful or malicious destruction of property may be non-dischargeable, though they may be modified in Chapter 13. Alimony, child support, criminal restitution, drunk driving or drug-related auto accidents, certain types of fines and penalties, student loans and certain types taxes are not dischargeable. Advice from experienced bankruptcy counsel is essential if you have any debts of this nature.

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Are Co-Debtors or Co-Signers Discharged From Their Debts If I File Bankruptcy?

Only if the co-debtor is your spouse and you are filing a joint bankruptcy. Co-debtors generally remain obligated in the event of a primary obligor's discharge in bankruptcy. If you desperately desire to protect a co-debtor, you may want to consider Chapter 13.

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Can I Repay Some Of My Creditors?

Yes. The law requires you to disclose all of your liabilities and all of your assets. However, you can still repay a creditor and you may want to if the creditor has collateral and you want to retain the property. Discuss any account that you desire to retain with your attorney.

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Is Property I Obtain After Discharge Affected?

If you receive a right to insurance proceeds, inheritances or divorce settlement proceeds within six months from the date of the filing of your Chapter 7 petition, then that property will become property of your bankruptcy estate. All other property obtained after the time of filing is for your sole benefit.

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Will I Have To Go To Court?

Yes. Generally, there is one hearing that you must attend. The hearing is conducted by a Trustee. An attorney should represent you at the hearing.

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How Long Will The Bankruptcy Take?

You should receive your discharge approximately four months after your case is filed. However, the discharge is effective as of your date of filing.

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What is the "Means" Test?

The Means test was established by the 2005 major ammendment of the Bankruptcy Code. It is an artificial test which uses your last six month's income to determin if your historical income exceedes the median income of a family your size in Michigan. If so, a rather complex formula to determine if you have disposable income, according to congress, so that granting your relief would constitute an "abuse of the Bankruptcy System." This has added a great complexity to the process which is too difficult to explain here. You need competent legal counsel to properly advise you in this regard.

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What about Credit Counselling and Debtor Education?

The new law requires certificates to be filed with the court showing that you have completed these requirements. One involves a phone call and the other a response to questions. They are not difficult, but add an additional expense of approximately $100 to the process.

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