Chapter 7 Bankruptcy Rules Overview
You may file for either a Chapter 7 or Chapter 13 bankruptcy. Both Chapter 7 and Chapter 13 have advantages, and both will ultimately appear on your credit report.
The type of bankruptcy you qualify for will depend on your monthly income, amount of debt, and overall financial situation. A Chapter 13 bankruptcy acts as a reorganization of debt where you can use monthly payments to pay off a repayment plan.
On the other hand, a Chapter 7 bankruptcy, also known as a liquidation bankruptcy, erases all debt that is legal to erase.
Chapter 7 bankruptcy rules determine who qualifies, how to file, and what debt is eligible for discharge.
Read on for a general overview of Chapter 7 bankruptcy basics.
Qualifying for Chapter 7 Bankruptcy
Every state has different income guidelines. Those who fall within their state's criteria may be qualified to file for Chapter 7 under the Bankruptcy Means Test.
The means test stops filers who have the ability to repay their creditors from discharging their debt. Filers have to show proof of all debt and income from the last six months to comply with the means test.
If you have a certain amount of income left over every month after paying creditors, you will fail the means test.
Although you may be ineligible for Chapter 7 bankruptcy, Chapter 13 is an option. A Chapter 13 bankruptcy petition allows filers to repay creditors with a repayment plan.
Who Is Ineligible To File Chapter 7 Bankruptcy?
Under Chapter 7 bankruptcy rules, you are ineligible to file based on:
- A previous debt was discharged within the past eight years under Chapter 7
- A previous debt was discharged within the past six years under Chapter 13
- Your income, expenses, and debt would allow for a Chapter 13 filing
- You have defrauded creditors or the bankruptcy court
- You failed to attend the required credit counseling
How To File for Chapter 7 Bankruptcy
You must attend required credit counseling before filing for Chapter 7. Upon completing credit counseling with an agency approved by the United States Trustee, you can then file for bankruptcy with your local bankruptcy court, but there is a slight cost. Check with the Trustee's Office to learn the exact amount. You are required to provide information about:
- Income, including disposable income
- Living expenses
- Creditor holdings of secured and unsecured debt
- The sale of a prior property
- A list of exempt property
Exempt property is a property that Chapter 7 bankruptcy rules allow a debtor to keep. Each state has its own guidelines, but exempt property typically includes property like clothing, furniture, and cars.
The Automatic Stay
Once you file for bankruptcy, the bankruptcy court will issue an automatic stay or an Order for Relief. An automatic stay stops most collection actions and protects you from a creditor's attempt to collect on debt during bankruptcy.
All collection activities, including any pending lawsuits, must cease. An automatic stay will prevent:
- Wage garnishment
- Filing of liens
- The seizure of a debtor's personal property, such as a house, a car, or a bank account
If the bankruptcy court dismisses a case, the automatic stay also terminates, and the creditor may commence collection activities.
The Role of the Bankruptcy Trustee
The bankruptcy court appoints a trustee for each bankruptcy case. The U.S. trustee oversees the case to ensure the debtor files the appropriate documents.
The trustee must also evaluate whether any non-exempt assets can be sold to unsecured creditors. The bankruptcy trustee determines whether the nonexempt property's sale will produce enough income to pay creditors. If the property is unlikely to generate substantial compensation compared to the time and effort needed to sell the property, the trustee will likely allow you to keep the nonexempt property.
The Creditors Meeting
After a debtor has completed and filed all of the necessary paperwork for a Chapter 7 bankruptcy, the trustee will schedule a creditors meeting. The trustee will review the paperwork at the meeting and gather any other necessary information. If you fail to attend the meeting, the trustee may motion to dismiss your case.
Other reasons for dismissal by the trustee may include failing to provide a copy of income tax returns at least seven days before the creditors meeting or failing to file a current income tax return.
In most cases, this creditors meeting is the only time you will have to go to the courthouse.
If the trustee determines that you have nonexempt property, you may have to either give up the property or supply the trustee with money in the amount of the property's value.
Sometimes, if the property doesn't have much value or would be too difficult for the trustee to sell, trustees will occasionally abandon the property, allowing you to keep it even though it is nonexempt.
Discharged Debt Under Chapter 7
A few months after the meeting of creditors, the bankruptcy court will hold a discharge hearing. Your unsecured debt (unsecured by property) is discharged, releasing you from personal liability. This generally includes:
- Credit card debt
- Personal loans
- Medical bills
Secured debt, such as a car loan or a mortgage, receives different treatment.
At the beginning of the bankruptcy process, you will elect to do one of the following:
- Pay the creditor for the replacement value of the property
- Return the property to the creditor
- Reaffirm or agree to new contract terms with the creditor
Some types of debts are not discharged. The following debt remains after a bankruptcy discharge:
- Child support
- Tax debt, unless a debtor meets the criteria to discharge federal tax debt
- Student loans, unless a bankruptcy court determines that undue hardship exists
- Debt created by fraudulent means
Once a discharge of debt occurs, the creditor can no longer attempt to collect the expunged debt.
Chapter 7 Bankruptcy Case Looming Over You? Get Professional Legal Help Today
You don't need to face creditors all by yourself. Filing bankruptcy may be one of the most significant financial decisions you'll ever make.
An attorney who is very familiar with the Bankruptcy Code and complex bankruptcy forms can answer your questions about filing for Chapter 7 bankruptcy. Let a bankruptcy lawyer help you make more informed decisions, saving you time and money. Find a local bankruptcy attorney today to consider this fresh start.