More on getting comfortable with the “straight bankruptcy” process with this story about how it works.
In the last blog post we walked halfway through the Chapter 7 case of a fellow named Henry. We go through the rest of his case here today.
- $30,000 in medical bills from a car accident, the portion not covered by insurance
- $45,000 in credit cards, payday loans, and various other debts, mostly incurred while unemployed recuperating from the accident
- $1,000 in several bounced checks
- $2,000 in income taxes to the IRS for 2012 when he didn’t have enough taxes withheld as he tried to pay all he could to his creditors
- a loan on his vehicle, that he’s struggling to keep current on
A few weeks before filing his Chapter 7 case, Henry was sued by a collection agency on his largest medical bill, for $18,000. This lawsuit pushed him to see a bankruptcy attorney, who helped him decide to file under Chapter 7. Our last blog post covered his decision to file, what it took to file the case, the “automatic stay” putting a stop to the lawsuit and other collections, and “reaffirming” his vehicle loan. Today’s blog post covers the rest of the process.
The “Debtor Education” Requirement
Following the strong suggestion of his attorney that he not wait, within a week after his Chapter 7 was filed Henry completes the online “debtor education” class. As simple as it is to take care of this task, he was told that if he forgot to do so his bankruptcy case would be thrown out. Henry actually finds the class to be somewhat helpful for dealing with his finances going forward.
The “Meeting of Creditors”
Henry understands that he has to personally show up to have a formal meeting with the Chapter 7 trustee, but he doesn’t worry much about it because his attorney assures him that it would almost for sure be short (usually less than 10 minutes) and very straightforward.
Even though it is called the “meeting of creditors,” in most cases no creditors show up. And if somebody does, often it would be to Henry’s benefit that they do. For example, the vehicle creditor may bring the “reaffirmation agreement” to the meeting for Henry and his attorney to review and sign so that he can keep his vehicle.
Mostly the meeting is for the Chapter 7 trustee to decide whether Henry has any assets that are not exempt (not protected) and so can be taken from him. He was completely honest with his attorney at the beginning of the case about what he owns, and she has assured him that the trustee has no right to any of it.
But his attorney has also informed him that this hearing has to be approached responsibly. Most importantly that means showing up at the right time and place. And then at the meeting it means answering the trustee’s questions accurately and honestly, with the attorney’s help as needed since she’s right at his side during the meeting.
In fact when Henry goes to the meeting, it’s pleasantly boring. The trustee asks a few questions confirming what was already provided in the bankruptcy documents, plus a few clarifying and follow-up questions about the value of his vehicle and some payments he made to his creditors before filing the case. None of his creditors are there. After about 7 minutes of questions and answers and related conversation, the trustee announces that the case appeared to be a “no-asset” one. This means that unless something dramatic happened the trustee did not expect to claim any of Henry’s assets on behalf of the creditors, just as Henry’s attorney told him would very likely happen.
The Bounced Checks
Creditors owed as a result of a bounced check can ask the bankruptcy court for the debt not to be discharged (legally written off) on the grounds that a bounced check is fraudulent. The argument is that a check presented for payment constitutes a statement by the writer of the check that there is money in his account to pay the check, and if there isn’t the check writer either intentionally or recklessly cheated the recipient.
What’s crucial here is that such an allegedly fraudulent debt IS nevertheless discharged UNLESS the creditor does in fact formally object to the discharge by filing a “nondischargeability complaint” at the bankruptcy court. AND of great practical importance, that must be done within a very short deadline or else the debt WILL still be discharged. That deadline is 60 days after the “meeting of creditors.” Since the “meeting of creditors” happens about a month after the Chapter 7 case is filed, that means that usually about three months after filing the Chapter 7 case the debtor will know whether the discharge of any debt will be challenged.
In Henry’s situation his attorney advises him that because it costs a fair amount of money in filing fees and attorney fees for a creditor to object to the discharge of a debt, and because none of the bounced check debts were for more than a couple hundred dollars, there was a good chance that most of the bounced check creditors would not file the formal complaint, or possibly even that none of them would. Indeed when the deadline for filing such complaints passes, Henry is pleased to learn that no complaints were filed. That deadline is extremely firm, so Henry knew that as long as he was thorough in listing all of his creditors once that deadline passes his creditors can never again object to the discharge of debts.
Completing the Chapter 7 Case
Immediately after that 60-day deadline passes without any complaints being filed, Henry’s bankruptcy judge signs the discharge order formally discharging all of his debts. Henry, his attorney, and all the creditors received a copy of that order. His Chapter 7 case is closed immediately after that.
Henry no longer owes the $30,000 in medical debts, the $45,000 in credit card and other debts, or the $1,000 in bounced check obligations. He is now debt-free, except for the vehicle loan that he voluntarily kept, and the $2,000 owed to the IRS that he knows he has to pay.
Resolving the Income Tax Debt
Right after receiving the discharge order, Henry knew that the “automatic stay” had expired as to the IRS—it now had a right to contact him to pay the tax owed—so he contacted them first. His attorney had already told him that with the relatively small balance owed of $2,000, he could set up an installment payment plan without having to provide the IRS any paperwork, or even a budget. He would have as much as 6 years to pay the obligation, although considering interest and penalties paying it off quicker would save him some money. But with interest relatively low—3% currently—and the penalties not huge either, Henry could make payments as low as about $30 per month. With one phone call to the IRS (he could also have applied through the IRS website), Henry sets up an installment payment plan of $50 per month, knowing that he could always pay more to take care of it more quickly.
With no creditors to pay each month except his car payment and $50 to the IRS, Henry had no problems making those payments, and indeed did so happily. He had enough money to take care of his living expenses without any problem. He considered his Chapter 7 case to be a great success.