Chapter 7 bankruptcy is the most common form of bankruptcy in the U.S. Out of 794,960 filings that occurred in 2016, more than 60% (490,365, to be precise) were Chapter 7. It differs from other forms of bankruptcy in that all dischargeable debt is wiped out by the bankruptcy court relatively quickly, giving you a fresh start much sooner than if you had filed for Chapter 11 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy is available to individuals, couples, partnerships, and corporations. Even beleaguered celebrities have successfully used it to obtain debt relief: Dionne Warwick, Kim Basinger, and Jerry Lee Lewis are some noteworthy examples.
How Chapter Bankruptcy 7 Works
Chapter 7 is a liquidation bankruptcy. In exchange for having your debts (including debts from credit cards) wiped out, you must surrender all nonexempt assets to your assigned bankruptcy trustee. The trustee sells these assets and distributes the net proceeds to your creditors according to Code-dictated priority, with unsecured debt being the lowest priority.
The thought of losing assets often deters people from filing Chapter 7, but the reality is that most cases are closed without any of the debtor’s property being sold because most belongings are protected by state exemptions. This is best determined with the help of a bankruptcy attorney.
Who Can File Chapter 7?
Your eligibility to file is determined by the means test, which compares your household income to the median income in your state.
In Oklahoma, for example, the median income for a two-person household is $48,313. If you make the equivalent or less, you will be allowed to file Chapter 7 in the bankruptcy court. If not, you may still be able to file after your expenses are closely examined and all proper deductions are made.
If you are unable to file for Chapter 7, a Chapter 13 bankruptcy may be a good option for you. With it, you’re able to retain your assets and pay off your debt over a period of up to five years by making payments to the bankruptcy trustee.
Oklahoma Bankruptcy Exemptions
All bankruptcy filers are permitted to exempt certain property, meaning that it is not subject to seizure and sale by the bankruptcy trustee to pay creditors. In some states, you can choose between state and federal exemption, but in Oklahoma only state exemptions may apply. Exemptions are reported within the bankruptcy forms package. Chapter 7 bankruptcy exemptions include:
- Homestead Exemption: You may exempt the full value of your primary residence, but acreage is limited. If you live in a village, town, or city, only one acre is exempt. In rural surroundings, the exemption is 160 acres. If more than 25% of the property's square footage is dedicated to business purposes, the exemption is limited to $5,000.
- Personal Property: In Oklahoma, certain types of personal property are exempt. They include clothing (up to the value of $4,000), books, portraits, household appliances, health aids, and personal injury and wrongful death recoveries up to $50,000.
- Motor Vehicle Exemption: You can exempt up to $7,500 of equity in a motor vehicle.
- Pensions: Protected pensions include tax-exempt retirement accounts such as 401(k)s and IRAS, including Roth IRAs up to $1,283,025.
- Tools of Trade: There is an exemption for up to $10,000 worth of tools, books, and other items needed to support your profession or business.
- Wages: Up to 75% of the wages earned in the 90 days prior to filing are exempt. You may be permitted to keep more if you are experiencing financial hardship. A bankruptcy attorney can help you address this exemption with the bankruptcy court if it applies to you.
- Life Insurance: Includes annuity benefits, group life policies, and a limited amount of stock insurance benefits.
Although federal exemptions can’t be used in Oklahoma, certain federal non-bankruptcy exemptions can be used to protect assets such as veterans’ benefits and federal retirement accounts. As an experienced bankruptcy attorney, the Law Offices of B David Sisson provides free consultations to answer questions about how filing a Chapter 7 with the bankruptcy court may impact you.
During the Chapter 7 Bankruptcy Process
Once a Chapter 7 case is filed with the bankruptcy court, an automatic stay goes into effect, preventing your creditors from taking any further collection actions against you. This includes anyone attempting to contact you to collect money for:
- Past-due credit cards
- Past-due medical bills
- Past-due vehicle payments
- Past-due mortgage payments
- Wage garnishment
Credit cards and medical bills are known as unsecured debts. There is nothing that acts as security that promises the creditor they will be paid. (Although there are some credit cards are known as secured credit cards.) Vehicle payments and mortgage payments are examples of secured debts. These are payments you must make to keep the security (the vehicle or the home). In Chapter 7, you will be required to reaffirm these secured debts if you want to keep them. If you decide to reaffirm the loans, you are agreeing to catch up on the payments you missed and to continue to make on-time payments.
You may also have priority debts. The most common priority debts include past-due taxes and family court payments such as alimony or child support. These are also examples of debt that cannot be discharged by the bankruptcy court.
You are required to appear at the “first meeting of creditors,” which is also known as a 341 meeting, and answer questions from the trustee and the creditors (although they rarely appear) about your assets and liabilities as reported on your bankruptcy forms. Your bankruptcy attorney attends the meeting with you. This is generally the only court appearance you make.
If you have nonexempt assets, the trustee takes control of them for liquidation and sale. Then, the creditors that filed claims by the bankruptcy court’s deadline may receive a specific percentage of the money received based on how they are classified. This money is disbursed by the bankruptcy trustee. If a creditor is unhappy with the payment amount, they can object.
Before you can receive your discharge from the bankruptcy court, you must receive counseling from an approved credit counseling agency. It is extremely important that you choose the credit counseling agency from the list of approved providers and not from a random online ad. While an ad may state that it offers credit counseling or that it is approved by the court, that doesn’t make it true.
Keep in mind that receiving your discharge from the bankruptcy court is the only way that you can actually get your opportunity to start over financially.
Receiving Your Discharge from the Bankruptcy Court
Most individual debtors are discharged within four to six months of filing Chapter 7. (Business debtors like partnerships and corporations cannot receive a discharge.) Any debts that you affirmed will continue to be your personal responsibility. Chapter 13 bankruptcy takes up to five years because there is a payment plan that must be approved and completed before the discharge can be issued. Chapter 7 bankruptcies do not involve a payment plan for debts.
How Often Can You File for Chapter 7?
You can only file for and receive a Chapter 7 discharge every eight years. You can file for a Chapter 13 a little bit sooner, but there are some caveats to consider.
Chapter 7 and Your Credit Report
Chapter 7 bankruptcy will be listed on your credit report from the date it is filed. It remains on your credit report for ten years. Yes, your credit score will be impacted. However, remember it was already affected: if you weren’t able to make payments on your bills, your credit score likely dropped from that. If you had no credit or little credit, you may not see much of a drop in the credit score. Remember that filing for bankruptcy and receiving your discharge allows you the opportunity to rebuild your credit.
When you take your course through an approved credit counseling agency, take the principles they teach you to heart. If there are any poor financial habits that might have contributed to the need to file for bankruptcy, it’s important to address them and change them.
Then, develop a budget and plan to stay on a better financial track to keep everything paid and to save for the future.
You’ll notice as time goes by that you’ll begin to receive opportunities from financial institutions to apply for secured credit cards. A secured credit card enables you to pay a security amount, usually around $200, to receive a prepaid credit card. You may make regular credit payments and have a limit set at the security limit. Over time, you may receive opportunities to increase the limit. The payments are reported to your credit. Before you choose any sort of credit card or enter any sort of contract that includes payments, read the agreement carefully. Understand the payment amount and the interest so that you don’t end up with more than you bargained for, especially if you miss a payment. When in doubt, say no.
However, it will remain important not to take on more obligations than you can handle. Even multiple small financial obligations begin to add up. The goal is to rebuild your credit score.
Learn More About Chapter 7 Bankruptcy in Oklahoma
At the Law Offices of B. David Sisson, we are here to answer your questions about Chapter 7 bankruptcy and help you determine if it is the right debt relief solution for you. Deciding to file bankruptcy is based on several personal factors.
Contact Attorney B. David Sisson for a no-obligation consultation today. We’ve assisted Oklahoma for more than 30 years with finding the right debt solutions to meet their needs.