INFORMATION FOR CHAPTER 7 DEBTORS IN GENERAL
THE BANKRUPTCY ESTATE
Call for free book on Chapter 7 and Chapter 13 615-255-3549
- The Bankruptcy Estate
- Meeting of Creditors (Your Court Date)
- The Automatic Stay and Your Creditors
- Your Credit Report
- Chapter 7 and Your Creditors
- Automobile Insurance
- Creditor's Status in Bankruptcy
- Surrendering Collateral
- Surrendering Real Estate
- Rescending (Canceling) Reaffirmation Agreements
- Preferential Payments to Creditors
- Income Taxes
- Your Budget
- Your Petition
- Discharge Ability of Debts
- The Chapter 7 Trustee
- Criminal Prosecution and Chapter 7
- Our Office
Chapter 7 of the Bankruptcy Code is called “Liquidation”. When a petition is filed under Chapter 7, a bankruptcy estate is created. The estate consists of your assets as well as anything you might inherit within six months of the filing of the bankruptcy petition, but does not include post-petition wages or lawsuits or other actions which come into being after the filing of the Chapter 7 petition. In Tennessee, a debtor may exempt from the estate and therefore keep everything he or she has if the total is less that $4000.00 per person ($8000 for a husband and wife). Personal property includes, for example, money in the bank, furniture, and vehicles without a lien on them. For personal property which is being paid for on time, your equity in the property equals the value of the property over what you owe on it. For most automobiles, the value of the automobile has depreciated to less than what you owe on the car and, therefore, there is no equity in this property. You may be able to void liens on certain personal property where you went to a consumer finance company (Washington Mutual, Citifinancial, American General, General Credit, World Finance, just to name a few) if it falls under the $4,000.00 of personal property exemption, you actually own the property, and it would be exempted except that you pledged it as security on a loan at one of these agencies. If you have a loan that falls under this category, you should do your best to remember every piece of property you put down as collateral so we can give you your options as to dealing with these loans. You would not be able to void the lien if you purchased the items at a store and the contract was sold to a finance agency.
As far as equity in real estate is concerned, a single individual debtor can keep $5000.00 of equity in his/her real estate. A husband and wife can keep $7500.00 in equity. The real property that you exempt in Tennessee must be your personal residence and must be in the State of Tennessee. If it is real property from which you receive rental income, and you do not live in it, you cannot claim the $5000.00 or $7500.00 exemption. If you have significantly more than $5000.00 or $7500.00 of equity in your home and you wish to keep your home, you may need to file a Chapter 13 bankruptcy. In a Chapter 13 you can keep your home, even if you have equity over and above the $5000.00 or $7500.00, if you agree to pay your creditors as much as they would get in a Chapter 7 bankruptcy. If you or your spouse is over the age 62, you may have additional exemptions of $12,500.00, $20,000.00, or $25,000.00.
When we prepare your petition, we will go over the values you have placed on your personal and real property and advise you as to whether or not we believe you have any assets which a trustee could take and liquidate to benefit your creditors. Also, the method of valuation for a debtor’s personal assets is normally what a trustee could get at an auction sale, which can be described as a liquidation sale or a garage sale, or what the goods would cost to a thrift store, such as Good Will. You should estimate in your own mind what you would sell these items for and place a value on them using this standard. In the vast majority of Chapter 7 cases, there are no assets.
The filing of a Chapter 7 petition and receiving a discharge stops you from filing another Chapter 7 petition for a period of eight (8) years and a Chapter 13 for four (4) years.
MEETING OF CREDITORS (YOUR COURT DATE)
Approximately two weeks after the filing of your Chapter 7, you should receive a notice from the United States Bankruptcy Court for the Middle District of Tennessee about your Chapter 7 meeting of creditors. This notice will contain information about the discharge date as well as information about when and where you go to court. The notice you get is the same notice which goes to all creditors and parties in interest. You will also get a follow-up notice from our office about the place, date, and time of your meeting. You must be at your meeting of creditors, and that includes husband and wife if both of you filed. Although the court, for good reasons, will continue a case, continuances are not routinely granted, and a request for a continuance must represent a genuine emergency situation. Failure to attend the meeting of creditors will result in dismissal of your Chapter 7 and your creditors will be free to try to collect the debts from you again.
THE AUTOMATIC STAY AND YOUR CREDITORS
The filing of the Chapter 7 automatically issues a federal injunction which stops all collection efforts by creditors. This is called the automatic stay. The protections of the automatic stay stop creditors from taking any steps to collect a debt. These are some instances where if you have had a bankruptcy dismissed within a year or two or more bankruptcies dismissed within a seven (7) year period where the automatic stay is limited to thirty (30) days and must be extended by the Court or where the automatic stay does not exist at all and you must get the judge's permission for a stay to protect you from your creditors. As a practical matter, a creditor will not know about the filing of the bankruptcy petition for at least a week to ten days. Therefore, if you are contacted by a creditor who has not received a notice, or if they send you a letter which crosses in the mail, please direct them to our office and we will advise them that you are under the protection of the court. Normally, when you get mail from a creditor, our office asks that you write on the bill that you have filed Chapter 7 and the name and address of my office along with our telephone number so that they can contact us for information about your case.
If a creditor continues collection efforts after you have advised him of the Chapter 7 filing, please let us know and we will take steps to stop the creditor. Please note that there are three notable exceptions to the automatic stay:
First, a bank, savings and loan, credit union, or other institution in which you have a deposit, is allowed to take the deposit and setoff all funds which were in the account at the time you filed your bankruptcy petition against any outstanding debt that you have with that institution. Accordingly, if you have a deposit with a financial institution with which you also have a debt, you need to take immediate steps to remove your funds if you want to keep those funds. We, therefore, recommend that you not make further deposits into an account with a financial institution with which you also have a debt or that you write additional checks from that account if you are going to close the account. Rather, you should open an account with another financial institution with which you do not have a debt.
Secondly, there are special rules concerning utilities, such as your electric company or your telephone company. A utility company may not collect money that you have owed them in the past, but they can make you pay a new deposit within 20 days. We are not talking about your monthly bill when it is due. However, if you are very behind in your utilities and you want to include it in your Chapter 7, you should advise us that you want the Court to set a reasonable utility deposit for new service within 20 days of the filing of your Chapter 7. If the utility company is trying to make you pay a very high deposit, you should advise this office immediately and we will file a motion on your behalf to require a reasonable utility deposit. You are responsible for any utility bills made after the filing of your bankruptcy. Child support obligations remain a matter that can only be addressed in state court.
YOUR CREDIT REPORT
Under the Fair Credit Reporting Act, the filing of a Chapter 7 petition remains on your credit record for a period of ten years. This, in and of itself, does not prohibit you from incurring credit, but it would be one of many factors a creditor would look at in determining whether or not you are credit worthy. We recommend that you begin to take immediate steps to rehabilitate your credit record. One good way to do that would be to establish a savings account, and to set up a secured credit line with a local bank or other financial institution. This would mean making a deposit a bank that would secure the credit card or other line of credit.
CHAPTER 7 AND YOUR CREDITORS
You must list all of your debts in your Chapter 7. Please note that only debts which were made before you filed Chapter 7 bankruptcy, with some exceptions that will be addressed later in this booklet, are dischargeable in Chapter 7. Any debt, including rent, association fees, utilities, or other services incurred after the filing of the Chapter 7 petition are not dischargeable under this Chapter 7 proceeding. Many times you can incur debt while you are under Chapter 7, such as doctor bills, and while you can attempt to add these debts to your existing Chapter 7 any time prior to your discharge. You should be aware that the creditor can object to your effort to add this debt, and if they do, the judge will probably not allow these debts made after you filed bankruptcy to be discharged (wiped out).
AUTOMOBILE INSURANCE
Pursuant to Local Rules of the United States Bankruptcy Court for the Middle District of Tennessee, proof of physical damage insurance (comprehensive and collision) on any automobile on which there is a lien (you are paying for on time) must be brought to the meeting of creditors. Without such insurance, a creditor who is financing your car can ask the judge to allow the creditor to repossess it. The Local Rules give the creditor the right to write you a letter demanding that you provide them with proof of insurance in writing within three days. If you do not get insurance, the creditor can repossess your car. So if you run into a situation without insurance and particularly if you get a letter requesting you to provide the insurance within three days, you must hand-deliver a copy of the insurance to your creditor and to our office. Sometimes a creditor, especially small used car dealers, agree to allow you to not keep insurance on your car, but these instances are not that common and you should assume that you need insurance on your car at all times if it is financed.
CREDITOR’S STATUS IN BANKRUPTCY
In Chapter 7 bankruptcy you normally have secured, unsecured, priority debts and administrative fees. The first $274.00 you pay this office will be applied to your filing fees for your Chapter 7, one type of administrative fee. Unsecured debts are promises to pay which are not secured by personal property or real estate, such as doctor bills, Mastercard and Visa purchases, back rent, back utility bills. Tax Obligations are normally priority debts and are not usually discharged. We will discuss some of the rules with tax debts later in this pamphlet. Secured debts are debts where your promise to repay the debt is secured by personal property or real estate.
Normally, there are four options with secured debts.
First, you can give back the property and not owe any money on the debt. This is called a surrender.
Second, you can reaffirm the debt and continue to pay your regular monthly payments. The creditor has you sign a reaffirmation agreement and this allows you to keep paying for the property at the original contract terms. It is at the creditor’s option to reaffirm. If the creditor does not wish to reaffirm, he can reclaim his property.
The third option is a redemption. A redemption is where you pay the value of the property rather than the entire payoff on the note. However, instead of paying in installments, with a redemption you must pay in a lump sum. The creditor has a right to contest the redemption and in some cases will send an appraiser to value the property and testify for the creditor.
The fourth option is that you can voluntarily work out an agreement with the creditor where you keep paying for the collateral (for example, a car), and the creditor lets you keep the property without signing any agreement.
SURRENDERING COLLATERAL
Ordinarily, the law will not force a creditor to pick up collateral you surrendered in your bankruptcy. If you surrender property to the estate and/or the creditor, the creditor does not have to reclaim the collateral. This situation is most common with old automobiles of little or no value. It may be necessary for you to tow the collateral to the creditor or to a local agent or representative of the creditor, or you may have to call the codes department in your county to have them pick up the collateral. It is outside of the services which we provide to deal with these situations.
SURRENDERING REAL ESTATE
When you surrender your house to the Bankruptcy estate, your Ch. 7 trustee will review the mortgage (deed of trust) on the property to make sure it is valid, and the Chapter 7 Trustee will also examine the value of the property to determine how much equity is in the property.
If the deed of trust is valid, perfected, and there is not enough equity in the property to recover assets for your Bankruptcy estate, the Chapter 7 Trustee will abandon the property to mortgage company (or companies depending on how many mortgages you have on the property).
If the property is abandoned to the mortgage company, that company will then foreclose of the property unless you enter an agreement with them to accept a deed in lieu of foreclosure. A deed in lieu of foreclosure is an agreement of deed allowing you to give back whatever interest you have in the property rather than foreclosing. Ordinarily, in a typical deed in lieu of foreclosure, the mortgage company agrees to not try to collect a deficiency. In Bankruptcy, the collection of a deficiency is usually not an issue because the Chapter 7 discharges any potential deficiency. There also can be tax consequences to a deed in lieu of foreclosure. We are not tax attorneys or certified public accountants and do not give tax advice regarding such a transfer. We also do not negotiate a deed in lieu of foreclosure as part of our services. If you elect to explore a deed in lieu of foreclosure, you will need to contact your mortgage company and request such an arrangement. Ordinarily, the mortgage company will be familiar with a deed in lieu of foreclosure.
If you do not enter a deed in lieu of foreclosure, the property is sold at foreclosure sale by the holder of the mortgage. Many times if there is a guarantor of the mortgage, (such as FHA, VA, HUD, etc) the mortgage company assigns or transfers the mortgage to the guarantor (FHA, VA, HUD, etc) and the guarantor will foreclose on the mortgage. The point is that you may surrender real estate to the Bankruptcy trustee, but it may be many months before the property is actually sold at foreclosure. The foreclosure can be reported on your credit report pursuant to a federal law known as the Fair Credit Reporting Act when the foreclosure sale occurs, even if the foreclosure sale is many months or a year or more after you filed Bankruptcy. This is a limited effort to explain some fundamental concepts of surrendering property in Chapter 7 Bankruptcy and does not cover all of the numerous issues involved with real estate and Chapter 7 Bankruptcy.
RESCENDING (CANCELING) REAFFIRMATION AGREEMENTS
If you reaffirm property, you have sixty (60) days to cancel. A debtor has sixty (60) days from the entry of the reaffirmation agreement or until the date of discharge to rescind (cancel) a reaffirmation agreement, whichever is later. A debtor can only rescind (cancel) a reaffirmation agreement in writing.
Should you wish to rescind (cancel) a reaffirmation agreement, you should immediately provide written notice to the creditor of cancellation and immediately telephone my office, speak with an attorney, and set an appointment to come to my office so I can file a notice of rescission of reaffirmation agreement with the United States Bankruptcy Court Clerk to cancel your reaffirmation agreement.
PREFERENTIAL PAYMENTS TO CREDITORS
The Chapter 7 trustee will be examining your statement of affairs to determine whether or not you have made any preferential payments to creditors. Under the Bankruptcy Code any payment to any particular creditor in excess of $620.00 made within 90 days prior to the filing of the bankruptcy petition is considered preferential towards that creditor, and the trustee has the authority to seek the return to that money to the estate in order to pay your creditors pro rata. If the creditor is an insider (a friend or relative), the trustee may go back one year and recover the preferential payment. If the payment is in anticipation of bankruptcy and is considered fraudulent, the trustee may go back as far as five years under the general Tennessee Fraud Statutes. These situations do not present themselves in very many cases, but we do want you to know that these types of transfers are subject to the trustee’s powers.
INCOME TAXES
A Chapter 7 delays a tax refund you might receive. The IRS reviews by hand the tax return of each Chapter 7 debtor to see if there is an outstanding tax liability. Therefore, your refund may be delayed for as long as four months. The delay is normally not as long if you file your return early.
YOUR BUDGET
We will also be preparing a budget as required under federal law. The purpose of the budget is to determine whether or not you have the ability to reorganize your debts under Chapter 13. An agency called the U.S. Trustee will be examining your budget to determine whether or not the filing of your Chapter 7 case represents substantial abuse of the Bankruptcy Code.
YOUR PETITION
When you receive a copy of your petition, it is important that you review the information in the petition very closely. If you believe that something is wrong, please let us know. It is important that you let us know about these matters right away so that we may amend your petition as quickly as possible.
DISCHARGE ABILITY OF DEBTS
It is important to know that certain kinds of debts are considered nondischargeable (you will still owe them after your discharge in Bankruptcy). These debts include taxes, alimony and child support, civil and criminal fines payable to a governmental unit, student loans, debts brought about as a result of driving a vehicle under the influence of alcohol or drugs, and debts which are related to fraud, false representation or willful and malicious injury to another person or property. If you have a problem with any creditor concerning one of these types of dischargeability issues, if you have not already discussed this with us, please talk to us right away so that we may properly advise you as to dischargeability of a particular debt. Normally, taxes are not discharged where no income tax return was filed, where the return was filed less than three years prior to the filing of the bankruptcy, or taxes which have been assessed within 240 days of the filing of your bankruptcy. Student loans are not discharged except for undue hardship. The debtor must file a lawsuit and prove an undue hardship to paying this debt.
The age of the loan no longer affects dischargeability.
THE CHAPTER 7 TRUSTEE
The filing of a Chapter 7 results in the appointment of a Chapter 7 trustee to administer your case. In the Middle District of Tennessee, there is a panel of trustee appointed by the court on a rotating basis. Your trustee will examine your case to determine whether or not there are any assets which cannot be exempted by you or upon which there is not a properly perfected lien by a secured creditor, based on information you have provided me in your case. Should there be any such assets, the trustee is required to liquidate such assets and pay your unsecured creditors on a prorata basis.
A Chapter 7 petition is a significant step for you to take. When we meet at my office prior to filing, we will review your situation and determine that a proceeding outside of court, or a reorganization of your debt under Chapter 13 or Chapter 11 of the Bankruptcy Code is either unfeasible or not in your best interest, or not what you want to do. Please note that you may convert your case to a reorganization under Chapter 11 or Chapter 13 at any time prior to the receipt of your discharge. The discharge you are seeking will provide you with immediate and permanent relief from creditor harassment. Please remember that bankruptcy was created to give the honest debtor, such as yourself, relief from the weight of oppressive indebtedness, and the ability to make a fresh start. Should you have any problems relating to the matters or administration of your case, please do not hesitate to contact his office.
CRIMINAL PROSECUTION AND CHAPTER 7
Chapter 7 DOES NOT stop Criminal Prosecution. This means that if you have written bad checks (the most common example of a crime), the party to whom you wrote the bad check could still have you arrested and criminally prosecuted if you, in fact, committed the crime.
Also, criminal restitution, probation fees, court costs, traffic ticket fines and costs, failure to return rental property, and any other criminal acts of any kind are not affected or discharged in your Chapter 7 bankruptcy.
OUR OFFICE
Please remember that your Chapter 7 will last for several months, and will require regular communication between you and this office. Please contact us by telephone as well as in writing any change of address or where you want your mail sent. Things happen very quickly in the Chapter 7 bankruptcy and it is important that we can always reach you immediately if we need to by mail and by telephone. Accordingly, should you require information about your case, change jobs, change your address separate from your spouse, desire to change your intentions about reaffirmation or redemption, or other matters relating to you case, you should contact our office for advice.
You should be aware as to what services are to be performed by this office. When you discuss fees with this office, we will quote you a flat attorney’s fee based on anticipated servicing of your Chapter 7 case to its completion and the entry of discharge. However, we reserve the right to ask for additional fees in the event that matters arise which are not considered regular and routine services. Such matters include, but are not limited to, litigated matters, attendance at depositions (Rule 2004 examinations), and other pretrial hearings with respect to adversary proceedings concerning discharge of a debt, research, preparation of briefs, preparation for trial, and court time at trial. Although these kinds of matters arise very rarely in Chapter 7 cases and are more likely to arise in cases that are business related, they might arise in your case. Should this office request additional fees, you have the right to consult with us concerning their fairness and reasonableness. We will quote you an hourly rate based on the experience and expertise of the attorney who will be handling any matters which are not regular and routine, and we normally require that a portion of the fee for certain services that are not regular and routine be paid in advance.