Chapter 7 Bankruptcy Rules Overview
You may choose to file for either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. While a Chapter 13 bankruptcy reorganizes debt into a repayment plan, 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.
Qualifying for Chapter 7 Bankruptcy
Income criteria established by bankruptcy law determine who may file for Chapter 7 bankruptcy. A filer's income must be equal to or fall below the median income in the filer's state to qualify under income guidelines.
Every state has different income guidelines. A filer that falls within a state's income criteria may file for Chapter 7.
However, if the filer's income is above the state's median, the bankruptcy court will require the filer to take a "means test" to establish eligibility for Chapter 7.
Chapter 7 Means Test 101
The means test prevents filers with the ability to repay creditors from discharging their debt. The means test assesses the filer's debt and income from the preceding six months.
If you have a certain amount of income left over every month after paying creditors, you will fail the means test.
Although you can be ineligible for Chapter 7 bankruptcy, Chapter 13 is an option. A Chapter 13 bankruptcy allows the debtor to repay creditors in a five-year repayment plan.
Who is Ineligible for Chapter 7 Bankruptcy
Under Chapter 7 bankruptcy rules, you are ineligible under the following circumstances:
- 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
- Their income, expenses, and debt would allow for a Chapter 13 filing
- You attempted to defraud creditors or the bankruptcy court
- You failed to attend credit counseling
How to File for Chapter 7
You must attend credit counseling before filing for Chapter 7. Upon completing credit-counseling with an agency approved by the United States Trustee, you can file for bankruptcy with a local bankruptcy court.
There is a cost associated with filing. Check with the Trustee's Office to learn the exact amount. You are required to provide information about:
- 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 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 protects you from a creditor's attempt to collect on a debt during the bankruptcy process.
In effect, 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 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 Trustee
The bankruptcy court appoints a trustee for each bankruptcy case. The trustee is responsible for overseeing the case to ensure that the debtor files the appropriate documents.
The trustee must also determine 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. At the meeting, the trustee will review the paperwork and gather any other necessary information. If you fail to attend the meeting, the trustee may make a motion to dismiss your case. Other reasons for dismissal by the trustee may include your failure to provide a copy of income tax returns at least seven days before the creditors meeting or the failure 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, though, if the property doesn't have much value or would be too difficult for the trustee to sell, trustees will occasionally "abandon" the property, essentially allowing you to keep it even though it is nonexempt.
The Discharge of Debt under Chapter 7
A few months after the creditors meeting, the bankruptcy court will hold a discharge hearing. Your unsecured debt (debt that is unsecured by property) is discharged. 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
Under Chapter 7 bankruptcy rules, you must repay some debt. 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 Looming Over You? Get Professional Legal Help Today
You don't need to face creditors all by yourself. Filing for bankruptcy may be one of the most significant financial decisions you'll ever make.
An attorney can answer your questions about Chapter 7 and help you make more informed decisions, saving you time and money in the process. Find a local bankruptcy attorney today.
Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.