What is Chapter 7 bankruptcy?
In Chapter 7 bankruptcy, the bankruptcy trustee cancels many (or all) of your debts. At the same time, the trustee might also sell (liquidate) some of your property to repay your creditors. Chapter 7 bankruptcy, also called “straight” or “liquidation” bankruptcy, is so named because the law is contained in Chapter 7 of the federal Bankruptcy Code. Here’s an overview of Chapter 7 bankruptcy for individuals – who can file, the forms you’ll need, how the process works, and what happens to your property and debts.
Chapter 7 bankruptcy for individuals
The whole Chapter 7 bankruptcy process takes about four to six months, costs $335 in filing and administrative fees and commonly requires only one trip to the US bankruptcy courthouse.
The debtor should consult a bankruptcy attorney before taking any action.You must complete credit counseling with a bankruptcy lawyer or agency approved by the United States Trustee.
Chapter 7 bankruptcy liability
Filing for bankruptcy won’t be possible if you had already received a bankruptcy discharge in the last six to eight years (depending on which type of bankruptcy you had filed for) or if, based on your income, expenses and debt burden, you could feasibly complete a Chapter 13 repayment plan.
To file for Chapter 7 bankruptcy for individuals, you fill out a petition and a number of other forms and file them with the bankruptcy court in your area. The forms will ask you to describe:
1. your property
2. your debts
3. your current income and monthly living expenses
4. property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called “exempt property”). Most states let 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
5. property you owned and money you spent during the last two years
6. property you sold or gave away during the last two years.
The automatic stay
Filing for Chapter 7 bankruptcy puts into effect something called the “automatic stay.” The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least for the time being, creditors won’t be able to legally grab (“garnish”) your wages, empty your bank account, go after your car, house or other property, or cut off your utility service.
Bankruptcy court control over your financial affairs
By filing for Chapter 7 bankruptcy, you are technically placing the property you own and your debts in the hands of the US 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 the property you acquire and income you earn after you file for bankruptcy.
Chapter 7 bankruptcy trustee
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 of what you owe them. The more assets the trustee recovers for creditors, the more the trustee is paid.
The trustee (or the trustee’s staff) will examine your papers to make sure that they are complete and look for nonexempt property to sell for the benefit of 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 you file, you (and all the creditors you 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 you filed. In most Chapter 7 bankruptcies, this is the debtor’s only visit to the courthouse.
After the creditors meeting, if 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. This means that you get to keep it, even though it is nonexempt. However, which property is exempt varies by state.
Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt.
Your secured debts
If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are automobiles and houses. If you’re behind on any of 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, that is unless you have enough equity in the property to justify it’s 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 might be able to wipe out the lien in Chapter 7 bankruptcy.
Chapter 7 bankruptcy discharge
A discharge releases individual debtors from personal liability for most debts and prevents the creditors from taking any collection action against the debtor. Because a Chapter 7 discharge is subject to many exceptions, debtors should consult a bankruptcy lawyer before filing to discuss the scope of the discharge. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99% of Chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors.