Practical Bankruptcy: Walking Through a Simple Chapter 7 Case–Part 1
You may be much more comfortable with the “straight bankruptcy” process once you read this story about how it goes.
Chapter 7 is called “straight bankruptcy” for a good reason: when done right, it’s straightforward.
It does involve many steps. And even the simplest ones have all kinds of traps for those unfamiliar with the law. But when done with a competent attorney they almost always go smoothly and you get the results you want: immediate relief from your creditors and a quick discharge (legal write-off) of your debts.
The following example will help you understand what is involved and how it usually plays out.
Henry owes $30,000 in medical bills that were not covered by insurance after a vehicle accident. He owes another $45,000 in credit cards, payday loans, and various other debts including a few bounced checks totaling about $1,000. All these were racked up while he was not able to work because of his injuries. He also owes $2,000 in income taxes for 2012 after he returned to work but didn’t have enough taxes withheld as he tried to pay as much as he could to his creditors. He is struggling to make payments on his vehicle, which he absolutely wants to keep. He just got sued by a collection agency about his largest medical bill, in the amount of $18,000.
Henry understands that if he doesn’t respond to the lawsuit his paycheck would start getting garnished, something he can’t let happen. If his wages were garnished, at the very least he would not be able to make his vehicle payments.
So he gets on the internet and looks through the websites of some local bankruptcy attorneys, until he finds one whose information responds clearly and thoroughly to the questions on his mind.
He meets with the attorney for a free consultation meeting, and is pleased that he feels quite comfortable with her and with the options he is presented with. He learns that he has no defense to the lawsuit on his medical bill, that a payment plan could maybe be negotiated to avoid garnishment, but that would do nothing for the rest of his debts, some of which would inevitably also result in lawsuits against him at some point. He learns that Chapter 7 would not discharge the $2,000 recent tax debt. But he recognizes that with virtually all his other debts discharged he could enter into a reasonable monthly installment payment plan to pay that off after the Chapter 7 was finished. He is also warned by his attorney that he may or may not have to pay his bounced checks depending on the aggressiveness of the creditors, and he is willing to accept that since the amount at risk is relatively small compared to all his other debts. Finally Henry is advised that with his income being under the median amount for his state, he qualifies for Chapter 7, and has no good reason to go through the much lengthier Chapter 13 process.
Decision and Filing the Case
Henry decides to file a Chapter 7 case, retaines the attorney to represent him in doing so, and makes arrangements to pay the filing fee and attorney fees. He does the very simple “credit counseling” class on the internet with the provider recommended by his attorney, sends her some additional information and paperwork she requests, and then meets again with her to carefully review and sign the many pages of bankruptcy documents prepared by her. These documents—the petition, schedules of creditors and assets, “statement of financial affairs,” and other related documents—are electronically filed at the bankruptcy court by his attorney the same day.
The “Automatic Stay”
Although all creditors on Henry’s bankruptcy schedules are informed about his new Chapter 7 case within about a week, as a precaution his attorney personally contacts the attorney representing the suing collection agency, which stops that lawsuit immediately.
No other creditors are allowed to sue Henry, take any collection action against him or his assets, or even contact him except through his attorney.
His Vehicle Loan
The initial filed bankruptcy documents include a “Debtor’s Statement of Intention,” in which Henry expresses his intent to “reaffirm” his obligation on the vehicle loan. This means he intends to sign a “reaffirmation agreement” which excludes this secured debt from the bankruptcy discharge so that he can keep his vehicle.
His vehicle lender sends a proposed reaffirmation agreement to Henry’s attorney, which Henry and his attorney sign, send back to the creditor, and is filed at the bankruptcy court. Henry keeps up on the vehicle payments, which he is able to do much more easily since he doesn’t have to pay any of his other creditors (other than modest payments on his income tax debt, which don’t start for another three or four months).
Please come back in a couple days to see the next blog post for the rest of this story: about fulfilling the “debtor education” requirement, attending the “meeting of creditors,” dealing with the bounced checks, finishing of the Chapter 7 case, and resolving the income tax debt.