Bankruptcy is a process that gives a you a financial fresh start, freeing you from overwhelming debt burdens. Chapter 7, also called “liquidation” or “straight bankruptcy,” is what many people connect with a bankruptcy case. As a debtor, your assets are sold, creditors receive payment, and you are freed from your debts.
There are several types of bankruptcy, and Chapter 7 is generally the simplest and quickest form. It’s available to individuals, married couples, corporations and partnerships. Know what to expect if you file a Chapter 7 case, and how you can have a fresh start within a few months.
Eligibility for Chapter 7
You must be eligible to file for bankruptcy, and the rules vary depending on the type of case you want to file. Bankruptcy laws changed in 2005, making it harder to qualify for Chapter 7 relief.
There is a means test for individuals to qualify for Chapter 7 bankruptcy. Your income and expenses are examined to see how they compare to the standard for your state.
For example, if you earn less than the median income for a family of your size in your state, you can file for Chapter 7 bankruptcy. If you earn more, a Chapter 13 case may be your option, where you pay part of your debts over time with your disposable income.
Eligibility also includes mandatory credit counseling and budget analysis. This will address the means testing calculations for you. While there are calculators available on the internet, a bankruptcy attorney is often the best resource to help size up your situation and options.
Filing a Chapter 7 Case
Bankruptcy starts with filing an official petition, schedules and Statement of Financial Affairs in bankruptcy court. You must provide:
- A full list of creditors, along with their claim types and amounts
- The source, amount and frequency of your income
- A list of all your property
- A detailed list of monthly living expenses
Collection Efforts Stop
Bankruptcy law forces creditors to stop all collection efforts against you as soon as your file. This mechanism is called the “automatic stay” and it’s one of the main benefits of bankruptcy. Everything is put on hold, and you get much-needed breathing room.
The automatic stay also prevents creditors from filing new lawsuits against you.
Creditors can ask the bankruptcy judge to lift the automatic stay and let them move ahead with collection efforts or lawsuits. For instance, a creditor could show it needs to take immediate action because property could lose value before your case is closed.
Appointing a Trustee
Once you file, a trustee is named to administer your case. Most of the action in your case happens in the trustee’s office, not the courtroom. The trustee takes control of your property, unless it’s exempt, and starts working through your case.
Exempt Property Is Protected
Some property is protected, or exempt from your creditors’ claims, and you get to keep it. When determining what is considered exempt, many states allow you to choose and use the state’s definition of exempt or the list set out by federal law. Some states require you to use the state’s list. Be sure to check your state’s laws to find out what applies to your state.
Exempt property can include these property types:
- Real estate such as a residence
- Trade or professional tools, or books
- Unmatured life insurance contracts
- Prescription health aids
- Social Security, veteran’s benefits, disability, illness or unemployment benefits
- Funds from an award in a lawsuit
The 2005 reform laws also limit your options to move to another state to take advantage of more generous exemptions.
Most Chapter 7 cases are “no-asset” cases, which means that you don’t have nonexempt property for the trustee to sell and use to pay creditors. Your bankruptcy petition states whether your case is “asset” or “no-asset.” If the trustee doesn’t agree, he or she must show why the designation isn’t correct.
341 Meeting – Questions on Your Debt
Twenty to 40 days after filing your petition, the trustee holds a first meeting of creditors, called a “341 meeting.” You must be present. You’re placed under oath, and the trustee and creditors can ask questions about your property and debts. Creditors seldom ask questions.
The only responsibility you have after the 341 meeting is cooperating with the trustee and providing any requested information or documents.
Creditors have 60 days after the meeting to convince the bankruptcy court they should be paid and your debts shouldn’t be “discharged.”
You can also be approached about “reaffirmation” of debts. This is an agreement between you and the creditor that you’ll pay off your debt and keep the property, such as a car.
Time Limits Apply to Reaffirm
Bankruptcy reforms changed the rules for reaffirming debts, too. Now you have to declare your dedication to a loan within 45 days after the 341 meeting. You can’t just continue to make loan payments as they come due.
There is also a purchase option you can use within 45 days of the 341 meeting. For example, you could buy your car by paying the loan balance within that 45 days. This option isn’t used much, because most people who file for bankruptcy don’t have that kind of money.
Steps to Reaffirm a Debt
If you decide to reaffirm a debt, you must file an agreement with the court. The agreement has to disclose:
- Your income and expenses so the court can see that you have enough money to pay the debt
- That you were advised of the amount of the debt you are reaffirming
- How the debt was calculated and;
- Your understanding that the debt will not be discharged
Unless you are represented by an attorney, the court must approve the agreement. If the court disapproves, there’s a hearing on the issue.
If an attorney represents you, he or she must certify in writing that you were advised of the legal impact of the agreement, you were fully informed, the agreement is voluntary, and reaffirmation won’t create an undue hardship on you or your family.
Discharge and Freedom from Debt
Your objective in bankruptcy is discharge, or the court’s order to end your liability for your debts, andyour creditors’ ability to seek further payment. If creditors haven’t persisted in trying to get money from you and the trustee within 60 days of the 341 meeting, your debts that existed before the filing date are discharged or canceled.
There are exceptions to discharge, and your attorney can help you determine which debts you may still have to pay. Here is how common debt types may be treated in a Chapter 7 case:
Denial and Revocation of Discharge
Creditors or the trustee can also object to discharge, or seek revocation of discharge, but it’s uncommon. Grounds to deny or revoke discharge can include fraud, such as your failure to disclose property, or giving false information during your case.
Take your time when deciding whether to file – the law says you can’t file again for two years. If you make the right decisions, it’s a quick, efficient way to get a fresh financial start.