Chapter 7 - LIQUIDATION OF PROPERTY
In chapter 7, the trustee "liquidates" or "sells off" your non-exempt exempt meaning property you keep property and uses the money to pay creditors. Most often debtors will not have any non-exempt property. In that case, you keep all your property. However, debtors should realize that the filing of a petition under chapter 7 may result in the loss of some property.
Note, however, that chapter 7 will not let you avoid paying a mortgage or a car loan. Those must be paid, even in chapter 7, if you want to keep the property. If you are behind on a mortgage or car loan, chapter 7 is likely NOT for you!
Chapter 7 - ELIGIBILITY
To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a "fresh start." The debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. A Chapter 7 bankruptcy discharge does not extinguish a lien on property (such as an attachment or execution) unless the bankruptcy judge issues a specific order regarding the lien. In many cases however, Lien removal, or "stripping" can be accomplished in a Chapter 13 (see Chapter 13 section of this site)
HOW CHAPTER 7 WORKS
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). Individual debtors with primarily consumer debts have additional document filing requirements. They must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.
The courts charge a fee of $299, which can be paid in installments or can be waived in certain circumstances.
The Bankruptcy Code allows an individual debtor to protect some property (that is, to claim it as exempt) from the claims of creditors and from the trustee. Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or the exemptions available under state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. The debtor should consult an attorney to determine the exemptions available in the state where the debtor lives.
Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. But filing the petition does not stay certain types of actions, such as criminal prosecution, and the stay may be effective only for a short time in some situations. The stay usually arises by operation of law and requires no action by a judge unless you've filed more than one case in a year. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Between 20 and 40 days after the petition is filed, the case trustee (described below) will hold a meeting of creditors. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting and answer questions. The case trustee and the US Trustee will review the papers we filed and decide whether a chapter 7 discharge is appropriate.
It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.