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Consumer Bankruptcy Law and Practice: 3.1 General Explanation of Chapter 7 Bankruptcy

When most people think of bankruptcy, they think of the type of bankruptcy provided for in chapter 7 of the Code—a liquidation proceeding sometimes called straight bankruptcy. This type of bankruptcy has by far been the most popular type of proceeding for individuals. Although the percentage of debtors choosing chapter 7 has diminished somewhat since enactment of the Code because of the advantages that chapter 13 offers, chapter 7 continues to be the chapter most frequently utilized, and it remains a lifeline for up to a million consumer debtors each year.

Consumer Bankruptcy Law and Practice: 3.2.1.3 Effect of Prior Bankruptcy Cases on Eligibility to File

One limitation exists on the broad right to file under chapter 7. An individual is not eligible to file a petition if, within the preceding 180 days, (1) they were the debtor in a bankruptcy case dismissed for willful failure to abide by orders of the court or to appear before the court in proper prosecution of the case or (2) they requested and obtained voluntary dismissal of a bankruptcy case following the filing of a request for relief from the automatic stay provided by section 362.20

Consumer Bankruptcy Law and Practice: 3.2.1.6 Dismissal for Abuse and the Means Test

Although not an eligibility requirement, section 707(b) permits a bankruptcy court to dismiss a chapter 7 case, after notice and a hearing, if the court finds that granting relief under chapter 7 would be an abuse of its provisions. Section 707(b) applies only to debtors whose debts are primarily consumer debts. A means test, found in section 707(b)(2) of the Code, determines whether there is a presumption of abuse based on the debtor’s ability to repay creditors. This test does not apply to debtors whose income is below certain standards.

Consumer Bankruptcy Law and Practice: 3.2.2 The Initial Forms

Although the bankruptcy filing process may seem intimidating at first, a voluntary case is actually started by the debtor69 filing a simple eight-page petition, which includes a statement of compliance with the prebankruptcy credit counseling briefing requirement,70 along with a statement of the debtor’s Social Security number or lack thereof,71 and, if applicable, an initial statement about any prepetition eviction judgment entered against the debtor.

Consumer Bankruptcy Law and Practice: 6.1.1 Explaining the Options to Clients

Whether, how, and when to file a bankruptcy petition is probably the single most important decision made in a bankruptcy case. Like most questions of legal strategy, it is rarely simple. It involves the interplay of a number of factors. Many of these are unique to each client; others turn on state law, custom, or practice in a community, or the provisions of the Bankruptcy Code.

Consumer Bankruptcy Law and Practice: 6.2.1.2 Protection of Property and Income from Unsecured Creditors

Bankruptcy is often the only sure way to protect a debtor’s property from execution by unsecured creditors. Bankruptcy may provide total protection for a home, car, or other vital property. The amount of property debtors are allowed to protect from creditors through use of exemptions in bankruptcy is, in many states, far greater than the amount they can protect in state law execution processes.8

Consumer Bankruptcy Law and Practice: 6.2.1.6 Litigation Advantages of the Bankruptcy Forum

An important factor to consider in opting for bankruptcy is the opportunity to litigate disputes with creditors in a federal court, which has at least initial jurisdiction over such disputes after a case has been filed.27 In some places the bankruptcy court may provide a far more sympathetic forum than the local state court, and it may be far more familiar with the applicable law.

Consumer Bankruptcy Law and Practice: 6.2.2.1 Generally

Despite all of the possible advantages that bankruptcy may provide, there are many valid reasons for choosing not to file a petition. Some of these concern problems in the cases of particular clients, and others relate simply to the fact that bankruptcy is not the only means to address a client’s legal problems and may not be necessary.

Consumer Bankruptcy Law and Practice: 6.2.2.4.2 Medical debts

Medical debts to doctors or hospitals with whom a patient would like to have a continuing relationship are often a source of concern. Particularly in small communities where there may not be many health care providers, clients may worry that a discharge will leave them with few options for future care.

Consumer Bankruptcy Law and Practice: 6.2.2.5 Clients’ Feelings of Moral Obligation

Another factor mitigating against bankruptcy may be the client’s personal feelings on the subject. This difficult subject, which is generally outside a lawyer’s training, must be discussed carefully and with understanding. Remember, it is not easy for clients suddenly to decide to seemingly discard those values that may have guided them since childhood.

Consumer Bankruptcy Law and Practice: 6.2.2.6 Cost of Filing a Bankruptcy Petition

Besides any attorney fees, bankruptcy carries an out-of-pocket cost for the filing fee, normally $338 in a chapter 7 case and $313 in a chapter 13 case.59 The chapter 7 filing fee may be waived by the court for a debtor unable to pay it.60 Debtors must also pay the costs of a consumer credit counseling briefing and a personal financial management education course, usually totaling $25 to $100, unless those costs are waived due to inability to pay.61 Occa

Consumer Bankruptcy Law and Practice: 6.3.1 Overview

Bound up with the decision of whether to file a bankruptcy case is the question of which type of bankruptcy offers the greatest benefit to a client. Although this decision may normally be changed at least once by converting the case after it is filed, it is nonetheless of obvious importance to ultimately settle upon the chapter offering the greatest advantages for the debtor.

Consumer Bankruptcy Law and Practice: 6.5.3.8 Less Common Reasons for Delaying a Petition

The situations described above are the most common scenarios in which the timing of the bankruptcy case can work to the debtor’s advantage or disadvantage. They are not the only ones. For example, if debtors have recently placed substantial amounts in education savings accounts, the amounts excluded from the bankruptcy estate under subsections 541(b)(5) and (b)(6) may be affected by a delay in filing. A quickly rising real estate market may dictate filing a bankruptcy case sooner rather than later so that the debtor’s home equity does not increase to an amount that cannot be exempted.