What Happens After Chapter 7 Bankruptcy?
Table of Contents
- What Happens After You File for Chapter 7 Bankruptcy?
- What CANNOT Be Discharged Under Chapter 7?
- Can Tax Debt Be Discharged?
- Can Student Loans Be Discharged?
- Can Secured Debts Be Discharged?
- Will the IRS Audit Me After I File Chapter 7 Bankruptcy?
- Can an Ex Get Out of Child Support Obligations Through Chapter 7 Bankruptcy?
- How Can You Clean Up Your Credit Report After Bankruptcy?
- Find a Bankruptcy Lawyer
This article answers some of the frequently asked questions on what happens after filing for Chapter 7 bankruptcy.
After you file for Chapter 7 bankruptcy, a number of things will happen. These include:
1) You will be assigned a bankruptcy trustee who will oversee your filing.
As soon as you file for bankruptcy, a trustee will be assigned to your case. The trustee is responsible for managing your bankruptcy estate. The trustee will also oversee the process of selling your non-exempt assets and distributing the proceeds to creditors.
2) An automatic stay will come into effect.
An automatic stay is a vital protection granted by the U.S. Bankruptcy Code. It bars lenders from taking any collection actions and coming after your property. An automatic stay will:
- Ensure your creditors don't come after you for car loans, unsecured debts, and other non-exempt property.
- Stop most wage garnishments. Wage garnishment occurs when some amount of your monthly income is taken from your paycheck to pay to your creditor.
Bankruptcy laws provide that any debtor can bring a civil suit against a creditor for willful violation of the automatic stay and can recover damages.
3) The trustee will call a meeting of creditors.
The trustee will call a meeting of creditors ( sometimes also referred to as the 341 meeting) to speak to you about your financial situation. After you file for bankruptcy, you will receive a notice that informs you where and when this meeting will be held.
Although creditors are also allowed to attend this hearing, in most cases they don't do so.
4) You will need to take credit counseling and financial management courses.
If you file for bankruptcy, you will need to complete two courses. These are:
- A pre-petition credit counseling, and
- A post-petition financial management course.
You should note the bankruptcy court will not discharge your debts until you complete these courses.
5) The trustee will sell non-exempt property and finalize no-asset cases.
If you have non-exempt property, the trustee will try to auction or sell those assets to pay creditors.
If, however, there is no exempt property, the trustee will inform the bankruptcy judge where the judge will likely enter an order discharging your debt. The trustee will also notify creditors advising them that there are no assets to pay.
Many times, because of court-ordered payment plans and consequences to credit scores, what happens after Chapter 7 bankruptcy depends on what debt is discharged in the bankruptcy.
The main reason behind bankruptcy is to give the debtor a fresh start. Accordingly, most unsecured debt, like credit card debt, CAN be discharged in bankruptcy. EXCEPTIONS include:
- Government-funded student loans
- Certain forms of tax debt
- Federal tax liens
- Child support
- Alimony/ spousal support
- Debts for personal injury or death caused by debtor's operation of a motor vehicle
- Fines and penalties for violating the law
- Certain tax-advantaged retirement plans
- Cooperative housing fees
Furthermore, there are certain debts that CANNOT be discharged under Chapter 7 but MAY be discharged under Chapter 13:
- Debts for willful and malicious injury to property
- Non-dischargeable tax obligations
- Property settlements in divorce or separation proceedings.
There are certain exceptions to these rules, however.
The bankruptcy court MAY discharge your tax debt if ALL of the following elements are met:
- The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You did not commit fraud or willful evasion.
- The debt is at least three years old.
- You filed a tax return.
- The IRS assessed the income tax debt at least 240 days before you filed your bankruptcy petition or has not yet been assessed.
Private student loans are sometimes discharged, though it is rare. Courts hold stringently to the requirement that you must show that paying off the loan will impose an "undue hardship" on you and your dependents.
To get this debt relief, you must show that you cannot pay the student loan payments now and will not be able to in the future. Courts have been more likely to grant this discharge in the cases of debtors who are permanently disabled from working.
Chapter 13 bankruptcy allows you to include the student loan in your repayment plan, but you are still responsible for all the debt that remains once your payment plan is complete.
Secured debts are debts that have security interests attached to them. For example, a mortgage is a loan that is attached to your home. This means the bank can start a foreclosure of the home if you default on your mortgage.
When you file for bankruptcy, the secured debtor will still have the right to take the property back to pay off the debt in accordance with your state laws. However, if you want to keep the property, then you will have a few options. These include:
- Sign a reaffirmation agreement agreeing you will still owe the money even after the bankruptcy process is finalized
- Buy the property back from the creditor
- Continue making payments on the property
There is no law that prompts the IRS to pay closer attention to, or audit, those who file bankruptcy. Furthermore, it would be impractical for the IRS to target all of the people who file bankruptcy, because there are simply too many (approx. 1.5 million per year). The IRS typically focuses on those who do not file their tax forms, do not pay their taxes, or file inaccurate or fraudulent information.
My Ex-Spouse Is Filing for Bankruptcy. Can He Get Out of His Child Support Obligations Through Chapter 7 Bankruptcy?
No. There are certain types of debts that the courts will not excuse. "Priority debts" are a type of debt that the court considers too important for a bankruptcy discharge. Child support is a priority debt. Therefore, your ex-spouse will still be responsible for child support even after Chapter 7 bankruptcy.
My spouse was married before, and they accrued a lot of debt and filed bankruptcy. This was over eight years ago, but the bankruptcy still appears on credit reports. We've also taken care of a lot of old debt, but it still shows up on our credit report as unpaid. How can we fix it?
Chapter 7 bankruptcy typically stays on a credit report for 10 years. There are circumstances, however, where it can be removed. And there have been plenty of times where credit reports have been inaccurate.
You can clean up an inaccurate credit report with the credit bureau itself. There is a form called "request for reinvestigation" that is available with your credit report. You could fill this out and submit it to the credit bureau, or you can write the credit bureau and include all of the inaccurate information that needs to be updated.
In your letter, ask the bureau to reinvestigate all of the inaccurate information. If the bureau insists that the information is accurate, you can directly contact the creditors and have them verify that the debts have been satisfied in writing. Then, send that writing to the bureau as proof, and ask them to update the information. You can also call the customer service line of the credit bureau.
Having bad credit can hinder you from being approved for loans and mortgages. Once you have cleared up and updated your credit history, you should have better luck securing a loan or a mortgage. You can still expect to pay higher interest rates, pay a higher down payment, or even need a co-signer, though. Because of your credit history complications, it would be wise to use a mortgage broker when you decide to buy a house.
Bankruptcy is almost always stressful for those who go through it, but it also can lead to financial security. In any event, you want to make sure you get the most favorable outcome for you and your family, which may benefit from a legal consultation. If you need help understanding the bankruptcy basics of Chapter 7 or need help planning your future after a filing, consider speaking with a local bankruptcy lawyer.
Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.