A Chapter 7 Bankruptcy case will eliminate most or all of a client’s debt and will allow the client to obtain a fresh financial start
A Chapter 7 bankruptcy case will eliminate most or all of a client’s debt, and will allow the client to obtain a fresh financial start. A Chapter 7 case is a highly effective tool in dealing with burdensome credit card and other unsecured debts, such as medical bills and personal loans. A Chapter 7 case is especially helpful when the client cannot pay their present bills and faces the prospect of creditor harassment, collection actions and bad credit.
The Chapter 7 case starts when legal documents, called a bankruptcy petition, schedules and statement of financial affairs, are filed with the bankruptcy court; these documents which are intended to disclose all of the client’s financial affairs at the time of the filing, contain information about all of the client’s assets, liabilities, income and expenses at the time the case is filed. Such information is obtained by us during our firm’s initial meeting(s) with the client and during an “intake” where we ask many questions about the client’s finances and collect documentation for the file, including proof of income, tax returns, bank statements, and the client’s bills and invoices. We also run a credit report, and where requested a judgment lien search, so that we can properly list a client’s creditors and debts on their bankruptcy schedules. Prior to filing the bankruptcy case the client must complete a pre-filing session of “credit counseling” which is a session, by phone or by internet, with a credit counsellor who analyzes the client’s finances in a private session with the client. Upon the filing of the Chapter 7 case, the client will be immediately protected from their creditors with an “automatic stay” which causes creditors to immediately stop all collection activity and to release bank restraints and wage garnishments. However, a secured creditor not getting regular post-petition payments, such as mortgage payments or car loan payments, can move for relief from the automatic stay, which in a Chapter 7 case would usually be granted, unless the debtor can quickly cure the amount in arrears.
During the Chapter 7 case the client will need to attend a creditors’ meeting where the client is interviewed by a Chapter 7 trustee whose role is to determine whether there are potential assets with equity that may be sold to satisfy the claims of creditors. Most Chapter 7 cases are considered to be “no asset” cases in that there are no assets available to satisfy the claims of creditors. The reality is that most Chapter 7 debtors do have assets, but their cases nonetheless are considered to be “no asset” cases because their assets are not considered to have significant equity. What diminishes from the potential “equity” in particular assets are liens, such as mortgages and car loans, and statutory exemptions which protect a certain amount of equity. Exemptions are amounts in value in particular assets that under the law that are unavailable to creditors.
In New York State we are currently able to select from either the exemption scheme offered under New York State law (where the amounts are valid April 1, 2021 – March 31, 2024) or the exemption scheme offered by federal law (Where the amounts are valid as of April 1, 2022 – March 31, 2025). The New York State exemption scheme is generous in its “homestead exemption” or in protecting a client’s residence for the amount of $179,950 per person owning and actually living in the home on Long Island, New York City and/or Westchester, NY. The federal exemption scheme applying to cases filed after April 1, 2022 is different than that of NYS, in that the federal homestead exemption is only $27,900. for individuals and $55,800 for spouses who co-own property, but there is a federal wildcard exemption that is more generous with better protection for personal property than that of NYS in that it gives a “wildcard” exemption of $1,475 plus up to $13,950 per debtor of any portion of the federal homestead exemption not used. The NYS wild card is only $3,575. The wildcard exemption can be used towards protecting any item of personal property, including tax refunds, bank accounts and vehicles. Other exemptions are for vehicles ($4,450 under the federal exemptions, or $4,825 under the NYS exemptions), household goods ($14,875. under the federal exemptions, or $11,975 under the NYS exemptions plus certain additional amounts for specific items ), personal injury awards ( $27,900. under the federal exemptions for actual physical loss and/or $9,000 under the NYS exemptions for actual physical loss), jewelry ($1,875. for jewelry under the federal exemption), whole life insurance policy surrender value ($14,875. whole life insurance surrender value under the federal exemption) and tools of the trade ($2,800. for tools under the federal exemptions or $3,575 under the NYS exemptions)
Most clients keep all of their property including their vehicles, homes and personal possessions as long as they stay current with the payments on these items and do not have too much equity in such property. If a married couple is filing for bankruptcy together, in many instances they could double the exemption protections. However, even in cases where there is some unprotected equity in an asset that is not covered by liens and/or exemptions, we can negotiate with the Chapter 7 trustee on behalf of the debtor to make a settlement payment to the trustee in order to keep the non-exempt portion of the asset and prevent the asset from being sold by the Chapter 7 trustee. The amounts the Chapter 7 trustee can collect in the case, either through sales or settlements is used to make pro rata payments to creditors and to pay for the administrative claims of the trustee for commission and for the trustee’s attorneys for legal fees.
Closely related to the issue of potential equity in assets, is the issue of “avoidable transfers”. These can be “preferences”, or payments to creditors made 90 days prior to the bankruptcy case for third party creditors, or one year prior to the bankruptcy filing for “insiders” (or relatives or close associates of the debtor). These can also be “fraudulent transfers” or transfers for less than reasonable value six years prior to a bankruptcy case, usually made to relatives or close associates of the debtor. Avoidable transfers are not alway obvious and what sometimes can appear to be an innocent transaction, under bankruptcy law can potentially be alleged to be an avoidable transfer.
In addition to the issues of assets and transfers, there is the issue of income level, in that persons qualifying for Chapter 7 relief can not have income above a certain level based on their household size. This test for income is called “Means Testing” and is applied if the client’s debt is primarily consumer debt (incurred for family, personal or household purposes) rather than primarily business debt. The client needs to have an average of six (6) months gross income that is below a certain median level in New York State, or alternatively pass a means test which takes into account the client’s necessary expenses in determining if the client qualifies for Chapter 7 relief (despite their income being above the median level). The median income in New York State on or after April 1,2022 for a single person household was $63,548.; for a 2 person household $80,784.; for a 3 person household $96,854.: for a 4 person household $117,706., with each added dependent (appearing on the tax return) adding $9,000. to the median income level. Even if a client is over the median income they may still have “wiggle room” to pass the median income test if their expenses are for items that are for basic necessities: housing (mortgage or rent), utilities, food and/or clothing which would effectively lower the client’s counted income.
The income issue needs to be carefully analyzed prior to filing a Chapter 7 case by comparing the client’s household income, relative to their family size, and their necessary allowed expenses, in determining whether the client should be able to file for Chapter 7 relief. Because the average household income on Long Island is higher than in many other parts of New York State, it is important to carefully average the client’s household gross household income for the 6 months prior to the filing of the bankruptcy petition. In many cases that are close to the line, this can be a tricky assessment, since even if the household income exceeds the median income level, there are many allowances for various essential spending that could potentially allow a “close” case under the proper circumstances to file despite income that is over the median. Where the gross household income does not pass the means test, the client can still proceed to obtain relief under Chapter 13, which does not have the same filing limits as Chapter 7.
However, even if a a “border-line means test” client successfully but barely squeezes through the “means test”, they also need to pass the “budget test” which looks at the client’s present net income (after taxes) and regular expenses to determine if the budget, not including obligations dischargeable in the Chapter 7 case, is negative, which allows a potential Chapter 7 filing, or if it is positive and shows a surplus of disposable income, which would disqualify the client for Chapter 7 eligibility. For additional information about income limits and means testing for Chapter 7 cases, please click here.
Finally, there is also the potential issue of the abusive incurring of debt prior to filing a bankruptcy case. The incurring of a large amount of cash advances and balance transfers shortly prior to filing a bankruptcy case, may be monitored by creditors and/or the trustee who may object to the discharge of such debt. In some cases where the client has incurred such recent “cash” debt, a certain amount of payments and waiting are advisable prior to filing the bankruptcy case. For additional information about debt and Chapter 7 cases that can be considered “abusive” and in “bad faith” please click here.
A related issue to abusive pre-bankruptcy case spending, are budgetary items as part of the Chapter 7 schedules showing exaggerated budgetary items, such as large car payments on luxury vehicles, an excessive number of vehicles, payments on unnecessary items such as boats, vacations, and/or secondary homes. In some cases if such unnecessary, luxury spending were taken out of the budget, the client would no longer qualify for Chapter 7 bankruptcy and would have a positive budget. In other cases the debtor’s qualifications for Chapter 7 are not affected, but the excessive luxury spending nonetheless should be stopped or curtailed as part of the pre-filing, bankruptcy planning for a Chapter 7 case where a client wants to show that they are not taking advantage of the bankruptcy system.
While the Chapter 7 case can eliminate unsecured debt against the debtor himself, it cannot do the same for secured liens filed against the debtor’s property. To the extent that prior to the bankruptcy filing, a creditor had obtained a judgment and had liened it against the client’s home, the client can move to avoid the judicial lien, based on it’s interfering with the client’s exercise of his homestead exemption. If there is no equity in the client’s home other than equity protected by the homestead exemption, such a motion can successfully avoid the judicial liens against the client’s property.
If a client wants to keep certain debt, and remain obligated to pay it, they can reaffirm the debt, or sign an agreement that is filed with bankruptcy court stating that the client, after consultations with their attorney, has freely decided to keep the debt. When it comes to credit card and other unsecured debt, there is usually little advantage to reaffirming debt, since usually new credit will be available after the bankruptcy case without the client committing themselves to repay old debt. It is not necessary to reaffirm any debt, other than potentially secured debt against a vehicle which per the 2005 Bankruptcy Amendments is supposed to be reaffirmed if the client wishes to keep their vehicle. However, the reality is that that most bankruptcy judges disfavor reaffirmations where the client’s budget is negative (which is the norm). Therefore, most lenders for vehicles (with the possible exception of Ford) are not strict about requiring reaffirmation agreements and are usually satisfied without a reaffirmation agreement if the client remains current with post-petition payments.
Some categories of debt are not dischargeable in bankruptcy. Most student loans, taxes and child and spousal support are not dischargeable. However there are exceptions in that “undue hardship”, which is extremely difficult to prove, can potentially allow the discharge of student loans. Income tax debt that is older than 3 years and where the debtor had filed a tax return 2 years before the bankruptcy filing, is also potentially dischargeable. However, sales and withholding taxes, as fiduciary taxes, are never dischargeable. Child and spousal support are generally not dischargeable, although there is potentially a very narrow and hard to prove exception in the case of a settlement, as distinguished from a payment obligation. Some acts make debt not dischargeable such as fraud, a crime, a malicious injury, and the concealment of assets in a bankruptcy case. In some cases the creditor or trustee must file an adversary proceeding within 60 days after the first scheduled creditors’ meeting in order to potentially object to the discharge. Such adversary proceeding is a contested proceeding within the bankruptcy case.
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act which was passed in by the United States Congress in the early part of the 2020 Coronavirus pandemic and signed into law by the President, on March 27, 2020, included not only emergency assistance to families and businesses affected by the pandemic but also some substantive changes to the Bankruptcy Laws, as follows:
CHAPTER 7 and COVID-19 – The Cares Act tried to allow easier access to Chapter 7 relief by not including in the income counted in applying the ‘means test” for Chapter 7 eligibility the extra federal assistance to the unemployment insurance (which was an extra $600. per week in addition to unemployment insurance and went down to an extra $300. per week).
The goal in each Chapter 7 case is to obtain a “discharge” order, or legal forgiveness for the debt, so that the client can obtain a “fresh start” and be able to rebuild their credit. The discharge of the debt makes permanent what the automatic stay protected against temporarily. Essentially, most of the client’s unsecured debts are now legally forgiven. There are some exceptions to the discharge, they are most student loans, most taxes and most child or matrimonial support obligations. Most clients discharge all their unsecured debt, although clients are able to voluntarily keep or “reaffirm” certain debts.
Chapter 7 is the most frequently used type of bankruptcy case and is often used by individuals who are overwhelmed by debts – including credit card debt, medical bills, repossession/foreclosure deficiencies or other debt – to eliminate their legal obligation to pay (or to “discharge”) such debt. Most Chapter 7 cases take approximately four (4) months and are highly effective in allowing a client to quickly deal with and resolve their problems by eliminating their obligation to pay debt that is beyond their ability to pay. However, a bankruptcy attorney needs to carefully review a client’s circumstances with the client to determine that the client does not have issues that may complicate the case, like major assets with significant equity; income that may be too high; alleged “avoidable transfers”; and/or debt taken by the client that may be deemed to be abusive and/or in bad faith.
The Law Office of Ronald D. Weiss, P.C. regularly represents its clients before the United States Bankruptcy Court in Chapter 7 cases, including in the filing and amending of numerous documents needed to proceed in Chapter 7. The Law Office of Ronald D. Weiss, P.C. represents Chapter 7 bankruptcy clients in the Eastern District of New York (which has jurisdiction over Suffolk County, Nassau County, Queens County, Brooklyn, and Staten Island, New York) and in the Southern District of New York (which has jurisdiction over Manhattan, Bronx and Westchester County, New York). Chapter 7 cases, like other types of bankruptcy cases can effectively help a client deal with its debt, however, a Chapter 7 case be complex, and to effectively proceed in a Chapter 7 case an individual should be represented by a bankruptcy attorney. The Law Office of Ronald D. Weiss, P.C. can discuss and advise you about Chapter 7 bankruptcy and how and whether it can help your particular circumstances.
The Law Office of Ronald D. Weiss, P.C. regularly represents its Long Island and New York clients in Chapter 7 cases before the United States Bankruptcy Court and can review with you issues relevant to a potential Chapter 7 case.
Our consultations are free, the advice may be invaluable.
Please call us at (631) 271-3737, or e-mail us at email@example.com for a free consultation with an attorney at our Melville, Long Island law office to discuss your specific situation and whether a Chapter 7 bankruptcy case may help you.