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Mar 12, 2014

Personal Bankruptcy

In a straight Chapter 7 bankruptcy, the bankruptcy trustee cancels many or all of your debts. At the same time the trustee might also sell or liquidate some of your property to pay your creditors. One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for those discharged debts. Debtors should realize that the filing of a petition under Chapter 7 may result in the loss of property.

Individual debtors who have regular income may instead seek an adjustment of debts under Chapter 13. A particular advantage of a Chapter 13 filing is that it provides individual debtors with an opportunity to save their homes from foreclosure by allowing them to catch up past due payments through a payment plan. Moreover, the Court may dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of Chapter 7.

Chapter 7 Bankruptcy Costs in Time and Money

The whole Chapter 7 bankruptcy process takes about four to six months, and commonly requires only one trip to the courthouse in Portland or Bangor. Fees include attorney’s legal fees, filing and administrative fees, and on-line credit counseling fees. A Chapter 13 filing will cost a bit more.

You must complete credit counseling with an agency approved by the United States Trustee within 180 days before filing. For a list of approved agencies, go to the Trustee’s website, www.usdoj.gov/ust, and click “Credit Counseling and Debtor Education.” Normally these counseling sessions can be completed on-line in the comfort of your home. There is a fee for these sessions.

Who Can File

You won’t be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan.

Bankruptcy Forms

To file for Chapter 7 bankruptcy, we fill out a petition and a number of other forms and file them for you with the bankruptcy court in Portland or Bangor. These forms ask you to describe:

  • Your property
  • Your current income and monthly living expenses
  • Your debts,
  • Property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called “exempt property”).Maine law lets you keep some equity in your home, clothing, household furnishings, Social Security payments you haven’t spent, and other necessities such as a car and the tools of your trade
  • Property you owned and money you spent during the previous two years, and
  • Property you sold or gave away during the previous two years.
    • It is important that you remember each and every debt. Chapter 7 does not protect you from a debt that you do not disclose to the Bankruptcy Court. Consider getting an on-line Credit Report from one of the three credit reporting agencies. And beware the real meaning on-line of the term “free.”

      The Automatic Stay

      Filing for Chapter 7 bankruptcy puts into effect an Order for Relief, known informally as the automatic stay. The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab or garnish your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits.

      The Bankruptcy Court’s Control over Your Financial Affairs

      By filing for Chapter 7 bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the Bankruptcy Court. You can’t sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court’s consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.

      The Bankruptcy Trustee for Chapter 7 Bankruptcy

      The court exercises its control through a court-appointed person called a bankruptcy trustee. The trustee’s primary duty is to see that your creditors are paid as much as possible on what you owe them. The more assets the trustee recovers for your creditors, the more the trustee is paid. The trustee will examine our filed papers to make sure they are complete and to look for so-called nonexempt property to sell for the benefit of your creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.

      The Creditors Meeting

      A week or two after we file, you and I (and all the creditors we list in your bankruptcy papers) will receive a notice that a Creditors Meeting has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers we filed. In the vast majority of Chapter 7 bankruptcies, this is your only visit to the courthouse.

      What Happens to Your Property

      If, after the creditors meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property, which means that you get to keep it, even though it is nonexempt. Most property owned by Chapter 7 debtors in Maine is either exempt or is essentially worthless for purposes of raising money for your creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt.

      How Your Secured Debts Are Treated

      If you pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses (real estate) and automobiles. If you’re behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before, unless you have enough equity in the property to justify its sale by the trustee.

      If a creditor has recorded a lien against your property because of a debt you haven’t paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy.

      If you wish to keep certain secured property, such as an automobile, you may decide to “reaffirm” that debt. A reaffirmation is an agreement between you and the creditor that you will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as you continue to pay the debt.

      The Chapter 7 Bankruptcy Discharge

      The discharge releases you from personal liability for most debts and prevents your creditors owed those debts from taking any collection actions against you. At the end of the bankruptcy process, all of your debts are wiped out, discharged by the court, except:

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