What is Chapter 7 Bankruptcy?
When it comes to bankruptcy, there are several types you can apply for like Chapter 7, Chapter 11 or Chapter 13 bankruptcy.
Chapter 7 is the most commonly filed bankruptcy. A Chapter 7 bankruptcy is called a “liquidation” bankruptcy and is used by individuals, partnerships, or corporations that have no hope for repairing their financial situation and repaying creditors.
During a Chapter 7 case, all of the property is liquidated in accordance with the rules of the federal Bankruptcy Code and the proceeds are used to pay creditors.
State and federal laws allow individual debtors to keep property necessary for the financial restructuring process during Chapter 7 bankruptcy.
These laws are commonly known as “exemptions” and allow debtors to protect a reasonable amount of equity in vehicles, homes, household furniture, clothing, electronics, tools of the trade, etc.
In truth, only about one Chapter 7 case in twenty-five is an “asset” case due to non-exempt equity in property.
The vast majority of cases are “no-asset” cases – the debtor keeps all of his or her property, and unsecured creditors receive nothing.
Find an Attorney
The first step in the Chapter 7 process is to find an experienced bankruptcy attorney. Bankruptcy law is a complex mix of federal and state law, federal and local court procedures, court decisions, and customs.
This is not a time to save a few bucks in a D.I.Y. project! Your attorney will identify the legal issues in your case and work with you to devise a solution in bankruptcy.
Your attorney will also ask you to provide financial documentation such as tax returns, titles and deeds, and pay-stubs.
This information is needed to draft a bankruptcy petition and accompanying schedules.
Attend Credit Counseling
Before you can file bankruptcy you must receive credit counseling from an approved credit counseling agency. The Bankruptcy Code requires that you complete a credit counseling session with a Department of Justice approved provider within 180 days of filing your case.
If you fail to complete this class prior to filing, you are ineligible for bankruptcy and your case will be dismissed.
Sign Your Paperwork
You will meet with your attorney to review and sign your bankruptcy petition and schedules.
You must verify the contents of your bankruptcy filing under penalty of perjury, so it is important to carefully review this document. Finally, you must pay your court filing fee (currently $306).
File Your Bankruptcy
The second that your Chapter 7 case is filed, the bankruptcy “automatically stay” is imposed. This is a temporary injunction prohibiting creditors from initiating or continuing lawsuits, garnishments, and other collection actions, including telephone calls or mail demanding payment.
The automatic stay stops all collection activity and provides a “breathing spell” so you and your attorney can develop a strategy for eliminating or repaying debts.
Attend 341 Meeting of Creditors
The bankruptcy court will send out notices of your Meeting of Creditors. Your meeting will take place between 30 and 45 days after your case is filed.
While creditors do not typically attend this meeting, you will answer questions under oath from the Chapter 7 Trustee about your debts and property. Your attorney will be present at this meeting to assist you.
Trustee’s Report
The Chapter 7 Trustee’s report is due to the bankruptcy court within 10 days after your Meeting of Creditors has concluded. This report states that the Trustee has completed a review of the case and that there are no assets to administer.
This is the Trustee’s signal to the bankruptcy court that it has no objection to the court closing the case. If there are assets, the Trustee will hold the case open.
Act on Statement of Intention
The Bankruptcy Code requires you to take timely action to reaffirm, redeem, or surrender secured property as stated in your Statement of Intention (filed with your bankruptcy paperwork).
Essentially, you have 45 days to perform after your Statement of Intention is filed.
Failure to perform means the property is removed from the bankruptcy estate, and creditors are free to repossess or take other collection action against the property in accordance with state law.
Attend Financial Management Class
You must attend a course in personal financial management from a Department of Justice approved agency. You must file your certificate and Official Form 23 with the bankruptcy court no later than 45 days after the date of the first scheduled meeting of creditors.
Rescheduling or continuing your meeting does not change the 45 day timeline. If you miss this deadline, the court will close your case without discharge.
Most courts will allow the debtor to reopen the case by paying a fee, file the certificate, and receive a discharge. However, you may incur additional attorney fees to reopen a closed case.
Wait
Creditors have 60 days after the date first set for the Meeting of Creditors to file an objection in your case. Objections are rare, especially in Chapter 7 no asset cases.
Discharge Order
If no objection is filed and all other requirements are satisfied, the bankruptcy court will enter an order discharging your debts.
The discharge order is a permanent legal injunction against the collection of debts. A discharge is only available to individual debtors, not to partnerships or corporations.
The discharge does not apply to all debts, so it is important for your attorney to identify any debts not included in the discharge order (like child support, student loans, or taxes).
Case Closes
In most Chapter 7 cases, the bankruptcy court will close the case soon after the order of discharge is entered. Reopening the case requires an order from the court.
When the case closes, your bankruptcy case is over.
