Chapter 7 bankruptcy is the most common form of bankruptcy and is frequently referred to as “liquidation.” Under liquidation, non-exempt property of the Chapter 7 Debtor (i.e., the person filing the bankruptcy petition) can be sold by a bankruptcy trustee to partially or fully satisfy creditors. However, given the very generous exemptions available to New York debtors the vast majority of Chapter 7 filings are “No Asset” cases, meaning the Chapter 7 bankruptcy trustee liquidates nothing. Following the trustee’s administration of the Chapter 7 case, most debts are discharged, or wiped clean. At Hayward, Parker & O’Leary Esqs., our Middletown attorneys have helped thousands of New York residents in Newburgh, Orange County and the mid-Hudson Valley get a fresh financial start.
In bankruptcy, an exemption protects the value of a debtor’s assets (i.e., real estate and personal property) from their trustee’s liquidation efforts. Some assets are fully exempt while others are exempt only up to a certain dollar amount. If a trustee does liquidate an asset the amount of debtor’s claimed exemption must be paid first, before any unsecured creditor get paid anything. As a practical matter, if there will be very little money left after paying off the exemption the Trustee will not bother to liquidate the asset in the first place—rahter, the Trustee will file a “No Asset” Report and end their administration of the case.
In New York a debtor can choose either the Federal Exemption Scheme or the New York State (“NYS”) Exemption Scheme. The NYS Exemption Scheme has a very large Homestead Exemption but the rest of the exemptions are rather modest. The Federal Exemption Scheme has a more modest Homestead Exemption but the rest of the exemptions are much more generous, including a “Wildcard Exemption” currently set at a maximum of $13,900.00 (the amount increases intermittently) that can be applied toward any asset that a debtor wishes to protect.
Preliminarily, in order to claim a Homestead Exemption a debtor’s name has to appear on the deed to their home. If spouses file a joint bankruptcy but only the wife’s name appears on the deed, only the wife will be able to claim a Homestead Exemption— even if the husband also lives in the home.
The Federal Homestead Exemption is currently $25,150. The amount increases intermittently, and if a husband and wife are filing a joint bankruptcy and both of their names appear on the property deed the available federal exemption increases to $50,300.00. If a debtor has a whole lot of equity in their home the Federal Exemption Scheme is probably not for them.
The NYS Homestead Exemption is determined by the county where you reside. Locally, for Orange County, Ulster County and Dutchess County the NYS Homestead Exemption is currently $149,975.00; for Putnam County it currently is $179,950.00; for Sullivan County it is currently $89,975.00. These amounts do increase intermittently as well, and if a husband and wife are filing a joint bankruptcy and both of their names appear on the property deed the available NYS Homestead Exemption can be doubled in amount, if the debtors choose to do so. If a debtor has a lot of equity in their home the NYS Exemption Scheme would be their choice to protect the home. However, use of the NYS Exemption Scheme precludes the debtor from claiming the Federal Wildcard Exemption.
Most bankruptcies begin with incessant calls, letters or other correspondence from creditors demanding payment. Usually, in response to these calls, the debtor comes to our office seeking solutions to their financial problems. During the first consultation, you meet with the attorney who will represent you for 60 to 90 minutes. Thereafter, you work with a paralegal to complete an initial inventory of your debts and assets. Before filing for Chapter 7 bankruptcy, you verify the information one final time. While this may sound like an excessive number of steps, this process — developed over decades of practice — prevents problems and unnecessary delays with your bankruptcy filing.
To qualify for Chapter 7, you must pass the means test. The means test compares your average current monthly income (CMI) with the median income of a family of your size in your area. For instance, if you live in White Plains, Newburgh, Orange County or anywhere in the mid-Hudson Valley area, you would be compared with families who also live in your area. If your income is less than the median, you pass the means test. If not, a more complex calculation to determine your monthly “disposable income” must be performed.
After your attorney files your bankruptcy petition, a trustee is appointed to oversee your case. A meeting is scheduled with your Chapter 7 Trustee, referred to as a “first meeting of creditors” or a “Section 341 meeting.” At this meeting, the trustee and creditors are entitled to ask you questions and raise objections to your plan. Following the meeting, the trustee may liquidate your non-exempt assets. However, in about 95% of cases there are no assets to sell because the assets are:
If assets are liquidated by your Trustee, the proceeds are distributed to your creditors according to a statutory priority scheme. This liquidation and distribution process does not affect the timing of getting your Discharge, which is usually granted 90 days after the bankruptcy filing unless an objection to such relief is made. A discharge is merely the legal way of saying certain debts can no longer be collected against the discharged debtor..
The length of time it takes a Chapter 7 Trustee to complete the liquidation of assets is usually determined by the nature of the assets involved. Liquidating a bank account can occur in a matter of weeks, while obtaining a settlement or jury verdict on a personal injury case can take years. In any event, the bankruptcy case remains open until all assets are administered and the Trustee’s distribution to creditors is made, which is frequently years after debtor has been issued his Discharge. If your Chapter 7 case is a “No Asset” case, as most cases are, the time between the date of filing the case and date of entry of the Discharge is about 90 days.
If title to your residence or other property is encumbered by a judicial lien that impairs your ability to claim an exemption authorized by statute, there are many instances where the judicial lien can be avoided. Note: judicial lien avoidance can also be achieved in Chapter 13.
Debtors in both Chapter 7 and Chapter 13 can seek a mortgage modification through the Court’s Loss Mitigation program.
Chapter 7 is a powerful means to get a fresh financial start, but it alone cannot assure your financial health. To begin with, there are certain debts that Chapter 7 does not discharge. These debts include:
Some debts are potentially not dischargeable if the affected creditor files a timely objection and prevails. Potentially non-dischargeable debts all involve some form of debtor misconduct, and include:
If the affected creditor fails to take timely action, or takes timely action but does not prevail in Court, then this type of debt is discharged. Neither the Chapter 7 Trustee nor the US Trustee is authorized to object to the dischargeability of a particular debt. If the affected creditor does not exercise its rights, it loses them.
The Chapter 7 Discharge is the “pot of gold” at the end of the Chapter 7 process—it is the relief all debtors seek. The Discharge is a permanent injunction that relieves the debtor from any further personal liability on the discharged debts. Simply speaking, the debtor is no longer required to pay any debts that are discharged. No legal actions may be commenced or continued against the debtor to collect on the discharged debts, and all other communications designed to coerce a payment from the debtor must cease, which includes telephone calls, letters and personal contacts.
Even though a debtor is not personally liable for discharged debts, any valid lien attached to debtor’s assets, such as a car loan or a filed judgment or mortgage encumbering real estate, that has not been avoided in the Chapter 7 case will remain valid and enforceable after the bankruptcy case. In this scenario the lien creditor is allowed to enforce their lien to recover the property secured by the lien. To illustrate this, assume the debtor owes $5,000 to an auto lender and the debt is secured by debtor’s car that is worth only $3,000.
In certain circumstances a creditor, the Chapter 7 Trustee or the US Trustee can file a complaint seeking to deny a discharge of all debts. Such complaints are rare and must be filed in a narrow window of time. The grounds include:
A creditor, the Chapter 7 Trustee or the US Trustee can ask the Court to dismiss a Chapter 7 case involving consumer (i.e. non-business) debt if the granting of a discharge would constitute an “abuse” of the bankruptcy process. The grounds for such a dismissal are:
Chapter 7 only takes care of an already existing debt problem. It does not contemplate nor attempt to fix the circumstances that led to the high debt burden. For example, after losing a job many people living with a high cost of living often rapidly accrue credit card debt. Chapter 7 bankruptcy can wipe away the credit card debt but it does not correct the imbalance between your income and expenses. You have to fix your own underlying problems.
Chapter 7 bankruptcy can wipe the slate clean so that you have a fresh financial start. Hayward, Parker & O’Leary Esqs. has helped thousands of New York residents in Middletown, Newburgh and Orange County restore their financial health. For your free consultation, please call us at 845-343-6227 or contact us online today.