Chapter 7 Bankruptcy Law

Chapter 7 helps you start over after getting overwhelmed by debt.

Filing for Chapter 7 bankruptcy can help you start over after overwhelming debt. Each year, hundreds of thousands of Americans file for Chapter 7 bankruptcy when they cannot afford to repay the debt they owe.

Continue reading to learn valuable information about the Chapter 7 bankruptcy process.

This page covers the following:

• What Is Chapter 7 Bankruptcy?
• Qualifying for Chapter 7 Bankruptcy
• Chapter 7 vs. Chapter 13 Bankruptcy
• Exceptions to the Means Test Requirement
• Other Eligibility Restrictions
• The Process of Filing Chapter 7 Bankruptcy
• What Happens to Your Property in Chapter 7?
• Deciding Whether to Reaffirm, Redeem, or Surrender Secured Debt
• The Final Chapter 7 Discharge
• Talk to an Attorney To Learn About Chapter 7

What Is Chapter 7 Bankruptcy?

There are four standard types of bankruptcy cases, each named by the federal Bankruptcy Code:

• Chapter 7 is the most common of the bankruptcy options. It’s available to people with low income who cannot afford to make any more monthly payments. The court sells all your assets (except exempt assets) and then pays your creditors. Chapter 7 and Chapter 13 mostly affect consumers.
• Chapter 11 is usually for corporations, but individuals can file, too. The debtor can keep their assets, operate their business, and enter a repayment plan.
• Chapter 12 is an option for family farmers and fishermen. They can keep their property and enter a repayment plan.
• Chapter 13 is a form of bankruptcy focusing on debt repayment. It allows you to keep your property. This gives individual debtors an opportunity to save their homes from foreclosure by allowing them to catch up on past-due payments.

Chapter 7 bankruptcy—also known as liquidation or straight bankruptcy—is a process where you can ask a bankruptcy court to wipe out most of your debts. This can help you start over. A judge will review your case and accept or deny the request.

If approved, the court puts an automatic temporary stay in place that stops creditors from trying to collect payments or take action. This can include wage garnishment, repossession, or foreclosure while your bankruptcy case is pending.

Chapter 7 bankruptcy provides immediate relief to people in serious debt, regardless of the amount of debt. But some drawbacks exist.

Filing for bankruptcy protection negatively affects your credit score and credit report for many years. You could lose certain non-exempt assets that are sold or liquidated to repay your creditors. But most assets are considered exempt and not subject to liquidation.

The liquidation process generally involves three steps:

1. Your non-exempt assets are sold
2. Your creditors and lenders receive payment from the sold property
3. You are freed from most remaining unsecured debts and can start over

Remember that your student loans, tax debt, and other types of secured debt are not dischargeable. You will still need to repay these unless you can show extraordinary circumstances. Most consumer debts, though, like medical bills, personal loans, and credit card debt, are dischargeable.

Qualifying for Chapter 7 Bankruptcy

Chapter 7 bankruptcy focuses on liquidating your non-exempt assets, if you have any, to repay creditors before your remaining debt is discharged. The process can eliminate many types of unsecured debt. This includes credit card debt, medical bills, and utility bills. Part of your property may be subject to liens that pledge the property to other creditors.

To qualify for Chapter 7 bankruptcy, you must meet specific eligibility requirements, including a means test. The test aims to prevent high-income earners from qualifying for Chapter 7. You pass the means test automatically if your average monthly income for the six months before filing for bankruptcy is less than or equal to your state’s median income.

Suppose your income is higher than your state’s median income. In that case, you may still pass the means test if it’s determined that you don’t have enough disposable income to pay your creditors after considering your income, expenses, and family size.

Chapter 7 vs. Chapter 13 Bankruptcy

People who do not pass the Chapter 7 means test can file for Chapter 13 bankruptcy instead. Chapter 13 requires you to repay debt over time using a repayment plan where installment payments are made to creditors over three to five years.

You can decide that Chapter 7 is not suitable for you at any time. Changing to Chapter 11, 12, or 13 filing is allowed as long as:

• You are eligible under the rules for those chapters
• Your case was not already converted to Chapter 7 bankruptcy from one of the other chapters
• You do not try to change the case repeatedly

Exceptions to the Means Test Requirement

Most, but not all, who file for Chapter 7 bankruptcy protection must pass the means test to qualify.

The following filers may not have to pass the means test after completing the Statement of Exemption from Presumption of Abuse Under §707(b)(2) form:

• Disabled veterans filing to eliminate debt incurred on active military duty
• Filers with debt primarily from operating a business
• Members of the National Guard or military reservists who are called to active duty before filing

Other Eligibility Restrictions

The following circumstances could also make you ineligible for Chapter 7 bankruptcy:

• You can repay some debt (you would likely file for Chapter 13 in this situation)
• Some debt was previously discharged in bankruptcy (you cannot file again too soon after a previous bankruptcy)
• Your previous bankruptcy petition was dismissed within the last 180 days
• You failed to go to credit counseling
• You defrauded your creditors

The Process of Filing Chapter 7 Bankruptcy

Filing for bankruptcy might seem like an overwhelming process. Below are the main steps so you’ll know what to expect.

Filing A Chapter 7 Petition

The Chapter 7 bankruptcy process begins when you file your documents and a petition with the bankruptcy court. This court serves where you live or where your business is organized (or where it has its principal place of business or principal assets).

A married couple can file a joint petition together or as individuals.

In an emergency (such as to stop a foreclosure), you can file for bankruptcy without filing all the necessary forms. Official bankruptcy forms are on the Administrative Office of the U.S. Courts website. You must file the remaining paperwork within 15 days.

You must attend credit counseling before you file. It is required to be:

• With a state-approved credit counseling agency
• At least 180 days before filing for bankruptcy

This counseling agency will help you determine whether Chapter 7 is the best option for you.

Other alternatives, such as entering into a repayment plan with the creditor, will sometimes resolve financial problems. It’s essential to work with a local bankruptcy lawyer who can help you figure out if Chapter 7 is the best option for your situation.

Chapter 7 Filing Fees and Administrative Fees

When you file for Chapter 7 bankruptcy, the courts will charge you a:

• Bankruptcy case filing fee (currently $245)
• Miscellaneous administrative fee (currently $78)
• Trustee surcharge (currently $15)

Typically, the total fee of $338 is paid to the clerk of the court when you file your paperwork. If you cannot pay this amount right away, you must:

• Ask the court’s permission to delay payment
• Pay in four installments of $84.50
• Complete all payments within 120 days after filing for bankruptcy
• Ask the court for extra time (if needed), extending your time to 180 days after filing for bankruptcy

If you and your spouse choose to file together, you only owe one set of these fees. If you don’t pay these fees, your case can be dismissed.

The court may waive the fee requirement if:

• Your combined income is less than 150% of the poverty level
• You can’t afford the fees even with an extension or four payments
• People who are unemployed or on social security usually qualify for a waiver

Required Information to Submit When Filing Chapter 7

Filing for Chapter 7 requires information about income, debts, and property. You should be ready to submit:

• A list of all credit cards and the amount you owe, including when the debts were incurred
• Any child support or spousal support (alimony) you pay or owe
• Your most recent federal tax return (and any tax returns filed during the case)
• Last year’s tax return (you may need to submit past years, but two years is most common)
• Paycheck stubs for the past 60 days
• A list of your assets, property, and any liabilities

Current monthly total income and expenses (be sure to list any predicted increase in income or expenses after filing, such as a promotion or holiday expenses)

• Your general financial affairs
• Any current contracts or unexpired leases
• Proof of your credit counseling class
• Your debt repayment plan (usually developed through the credit counseling class)
• A record of qualified federal or state education tuition accounts (QTP) or interest gained

Even if you decide to file together, you both still need to submit all the documents above as if you were filing alone, such as both spouses submitting their income records.

Appointment of Bankruptcy Trustee

You are appointed a bankruptcy trustee once your case is filed. They handle the paperwork and questions and monitor your case from beginning to end.

Your trustee must, by law, make you aware of potential bad outcomes. They should tell you that:

• Bankruptcy will be listed on your credit history
• You cannot file Chapter 13 for four years
• Your credit score will decline after the bankruptcy discharge
• Reaffirming a debt has consequences

You will be told about these risks at or before the creditor meeting (see below). Ask questions if you do not understand one of the outcomes.

The ‘Automatic Stay’

Once you file your petition, a legal process called the automatic stay takes place. This is a legal term for "automatically stop."

An automatic stay will stop collection agencies from calling you about the debt. Some actions or steps cannot be stopped, and the stay might only help you for your case’s duration. But, if the stay is currently in effect, the creditors can’t sue you, garnish your wages, or call you about the debt.

The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses you provided in the filing documentation phase.

Meeting of Creditors in Chapter 7 Bankruptcy

After you file for bankruptcy, the bankruptcy trustee will schedule a meeting with creditors. Creditors and the trustee may ask you questions about bankruptcy documents and other relevant information.

The trustee will hold the meeting 20 to 40 days after you file the paperwork. You will be expected to:

• Attend the meeting (both spouses must attend if you filed together)
• Be put under oath and answer everything honestly
• Answer questions from the trustee and creditors
• Cooperate with the trustee
• Provide any financial records or documents the trustee requests

In most cases, this is the only time you will appear in bankruptcy court. The court is often a conference room at the courthouse, not a courtroom used for trials and hearings.

The bankruptcy judge will not be at the meeting so they can have independent judgment and not be swayed in either way after meeting you.

After the Meeting of Creditors

Within 10 days of this meeting, your bankruptcy trustee will report back to the court. They will determine if you qualify under the rules of the means test. The means test determines eligibility for filing bankruptcy under Chapter 7.

After Filing: Attend Personal Financial Management Counseling

Before receiving a bankruptcy discharge, you must attend a course about financial management with an agency approved by the U.S. Trustee’s office. This is different from the credit counseling course you attended before filing.

You’ll receive a certificate to file with the bankruptcy court—a special kind of federal court—upon completion. This requirement is necessary for the fulfillment of bankruptcy.

What Happens to Your Property in Chapter 7?

• Bankruptcy Exemptions: Property You Can Keep
• Non-Exempt Property Under Chapter 7
• Deciding Whether to Reaffirm, Redeem, or Surrender Secured Debt

Bankruptcy Exemptions: Property You Can Keep

Chapter 7 bankruptcy involves gathering certain property or assets (if you have them) and selling them to pay off as much debt as possible. This step, known as liquidation, must happen before the rest of your debt can be discharged or eliminated.

There is good news. State and federal bankruptcy law protects many kinds of property from being sold off to pay these debts. These protections are called "exemptions" and they include:

• Your house or a portion thereof
• Your car or a portion thereof
• Certain personal property
• Wildcard exemptions (a catch-all for property that doesn’t fit into a designated category)

Exemptions are determined at the state law level or the list set out by federal law. Some states require you to use only the state’s list. Be sure to check your state’s laws to find out what applies to you.

Non-Exempt Property Under Chapter 7

Most people who file for bankruptcy do not lose any assets in liquidation since many property types are exempt. However, some property cannot be protected from creditors during the bankruptcy process, and these can be liquidated. This is known as non-exempt property.

Non-exempt property may include:

• Expensive musical instruments (unless you are a professional musician)
• Collections of stamps, coins, and other valuable items
• Family heirlooms
• Cash, bank accounts, stocks, bonds, and other investments
• A second car or truck
• Vacation homes

Deciding Whether to Reaffirm, Redeem, or Surrender Secured Debt

Secured debts are debts secured by collateral, such as a car that serves as collateral on a car loan. These secured debts give a creditor the right to take the property if you do not pay the debt, even if the debt is discharged in your bankruptcy proceeding.

In bankruptcy, you can do any of the following with property attached to secured debt:

• Reaffirm: You can choose to keep the property by entering into a new agreement with the creditor to repay the debt
• Redeem: You can choose to keep the property by paying the creditor the current value of the property
• Surrender: You can choose to give the property back to the creditor (the simplest option)

Part of your filed bankruptcy paperwork details how you’ll handle your secured debt, such as your home or auto loan.

The Final Chapter 7 Discharge

Typically, about two months after the meeting with creditors, you’ll receive a Notice of Discharge from the bankruptcy court.

After receiving this notice, you’re no longer responsible for paying the debts discharged in bankruptcy. A discharge releases you from personal liability for certain dischargeable debts. This debt relief is your fresh start.

Talk to an Attorney To Learn About Chapter 7

Getting the right help when you file for bankruptcy is crucial to its success. Lawyers represent creditors and other parties involved in a Chapter 7 bankruptcy. You should have one, too.

Legal counsel can alert you to opportunities to protect your property and negotiate for the best terms. Contact an experienced bankruptcy attorney. They can answer any bankruptcy-related questions and help you get through your bankruptcy proceedings.