Chapter 7 bankruptcy is the most common type of bankruptcy. Chapter 7 is a “liquidation” bankruptcy. The bankruptcy court will eliminate as much of your debt as the law allows. However, in exchange for eliminating your debts, some of your assets may be sold to obtain funds to pay some of your debts. Exactly which debts are eliminated and what assets might be sold depends on your particular circumstances. Many Chapter 7 bankruptcy cases are considered “no asset” cases, meaning all of the assets are exempt, or the assets that are not exempt are not worth the time and expense of sale. If you have concerns, you should discuss your assets and debts with a knowledgeable bankruptcy attorney.
Chapter 7 Process:
This graphic gives a general outline of the Chapter 7 bankrutpcy process:
To start a Chapter 7 bankruptcy proceeding, you file a “Petition” for bankruptcy protection with the Bankruptcy Court. You file your Petition with the Court that serves the area where you live or where your primary assets are located. Along with the Petition, you file various lists (called “Schedules”) your assets, your debts, your current income and expenditures, and several other pieces of information. The Court charges a $306.00 filing fee, although that fee could be waived or deferred in some circumstances.
Once your Petition is filed, most actions by your creditors are blocked or suspended by the “Automatic Stay.” The Automatic Stay is a bankruptcy-related restraining order that prohibits your creditors from collecting on most types of debts. Most creditors cannot start or continue lawsuits, foreclose on or repossess your assets, garnish your wages or financial accounts, or even make telephone calls to you. Your creditors are notified of the bankruptcy filing by the court clerk which is sort of a bankruptcy restraining order against your creditors.
Your bankruptcy hearing (called the “Meeting of Creditors” or the “341 Hearing”) is generally held about a month your Petition is filed. You must attend the meeting. The hearing is conducted by the bankruptcy trustee. The trustee will ask you several questions about your financial affairs and your bankruptcy paperwork. Your creditors may also attend and are entitled to you questions about your financial affairs, although the creditors usually do not do so. The hearing usually lasts around ten minutes.
At the end of the Chapter 7 bankruptcy process, you should receive a “discharge”. The Court issues an Order eliminating your debts. From that point forward, you are no longer responsible for the discharged debts and your creditors are forever prohibited from taking any action against you.
You should be aware that not all debts are discharged or eliminated in Chapter 7 Bankruptcy. The laws related to what debts are discharged are complex. If you have any questions about whether your debts are dischargeable in Chapter 7 Bankruptcy, you should contact a bankruptcy attorney.
Qualifying for Chapter 7: The Income Test
To qualify for a Chapter 7 Bankruptcy, you must pass the Chapter 7 “Income Test”, also known as the “Means Test”. The test is part of the bankruptcy paperwork submitted to the Court. The test considers your income and expenses over the prior six months and compares it to certain averages. If your income is too high, you may not be eligible to file for Chapter 7 bankruptcy protection.
If you do not qualify for a Chapter 7 Bankruptcy, or if you decide that Chapter 7 Bankruptcy is not a good option for you, you may consider Chapter 13 Bankruptcy.
Should I Use an Attorney to File for Bankruptcy?
Some people file a Chapter 7 Bankruptcy on their own, without the assistance of an attorney. However, this area of the law is complex and can be difficult to decipher. A poorly-executed Chapter 7 filing could result in a sale of your assets or your case could be dismissed. Therefore, we always recommend that you consult a bankruptcy attorney before filing for Chapter 7 bankruptcy petition on your own.
For more information about Chapter 7 bankruptcy, please see our summary of Frequently Asked Questions.