Chapter 7 Bankruptcy Rules

A Chapter 7 bankruptcy is a liquidation arrangement. In this arrangement, a debtor relinquishes all non-exempt property and turns it over to a bankruptcy trustee. The trustee will convert it to cash, which is to be distributed to creditors. The debtor will usually receive a discharge of all eligible debts within about four months. In many cases of Chapter 7 bankruptcy, the debtor has no assets to lose. The bankruptcy proceedings give the person a fresh start fairly quickly. The primary function of bankruptcy is to allow people who are hopelessly burdened by debts to make a fresh start by completely erasing all of their debts.

Most Common Reasons for Filing Chapter 7 Bankruptcy

Unemployment
Accident or illness
Large medical bills
Overextended credit
Marriage problems
Other unexpected major expenses

What are the Chapter 7 qualifications?

To be qualified for filing Chapter 7 bankruptcy, your income must equal or be less than the median income amount for your state and local area. Each area has its own individual guidelines. If you fall within your state’s required income criteria, then you may be allowed to file a Chapter 7 bankruptcy.
If your income is higher than the state’s median amount, you may be required to take a bankruptcy means test to determine whether or not you are eligible for a Chapter 7 bankruptcy.
The bankruptcy means test is used to prevent people who do have the means to pay their creditors from using bankruptcy as a way of evading the debt. The test is an assessment of the individual’s debt and income over the past six months that demonstrates the person’s ability to pay.
If the test indicates that an individual has a certain amount of money left over after paying his or her creditors, then the means test has been failed. The debtor will not be eligible for Chapter 7, but may still file a Chapter 13 bankruptcy. Chapter 13 lets you repay your creditors via a five year plan.

You are ineligible for Filing Chapter 7 Bankruptcy when:

The amount of income, expense and debt indicate eligibility for Chapter 13.
The debtor has used Chapter 7 within the past eight years to discharge a debt.
The debtor has used Chapter 13 within the past six years to discharge a debt.
Failure to attend credit counseling.
Attempting to defraud bankruptcy court or creditors.

How to file chapter 7 bankruptcy

The individual filing the bankruptcy is required to attend credit counseling before filing Chapter 7 bankruptcy. Once credit counseling with an agency that has been approved by the US Trustee has been completed, a debtor can then go ahead and file the bankruptcy through the local bankruptcy court.

The debtor will be required to disclose information about all income, expenditures, and debts of both a secured and unsecured nature. He or she will also provide a list of property that is exempt from the bankruptcy and information about the sale of property prior to the filing of the bankruptcy.

Every state has individual guidelines regarding what type of property is considered to be exempt from bankruptcy, but typically, exempt property would include personal effects, furniture, clothing and a car.

How much does bankruptcy cost?

In a federal bankruptcy court, the court costs generally amount to approximately $500. If an attorney represents you, the fees for the attorney can run anywhere from $1500 to $2500 or even more. In 2005, federal bankruptcy laws were changed, placing more responsibility on the attorneys, resulting in a substantial increase in bankruptcy attorney fees. Another, non-monetary cost of bankruptcy is that your credit score will be vastly reduced. The bankruptcy will remain on your credit record for up to ten years, making it very difficult to get new credit, even after you are discharged.

Before you begin, gather the necessary information, and obtain a relief from automatic stay.Prior to going to the courthouse to file for bankruptcy you will need to gather together all the information that you will need about your debts. You will need your creditors’ names, addresses and the amounts that you owe each of them. You should be prepared to disclose all of your income from all of your sources. You will also need to list all of your living expenses and all of your assets, both exempt and non-exempt. This includes everything from investments, cars and homes to furniture and clothing.
Once you have all the necessary forms, you can file. As soon as you file for bankruptcy, the court will immediately issue a stay, or an order for relief. Immediately, any lawsuits against you, collection actions and wage garnishees will be stopped.
The automatic stay protects you. It prevents any creditor from attempting to collect a debt during the bankruptcy proceedings. Once a stay is in place, all forms of collection activities including lawsuits will cease according law. There will be no garnishment of wages, liens, foreclosures or repossessions of any of the debtor’s property.
If a case is dismissed by the bankruptcy court, the stay will be terminated and all collection activities may recommence.

The 341 meeting and the trustee’s role

For each bankruptcy case, the court will appoint a trustee to oversee the bankruptcy. The responsibility of the trustee is to make sure that all of the proper documents are filed and determine whether selling all non-exempt property will generate sufficient income to pay off creditors.
If the non-exempt property is not likely to raise enough money compared with the amount of time and effort required to sell said property, then the trustee will probably let the debtor keep the property.
Within a month of filing bankruptcy, the debtor will be asked to attend a 341 meeting, which the creditors may also attend if they wish. After the meeting, the trustee will liquidate all non-exempt properties and the proceeds will be divided amongst the creditors.
At the 341 meeting, the trustee reviews all paperwork and gathers any additional information that may be needed. If the debtor does not attend the meeting the trustee can make a motion to have the case dismissed.
One of the other reasons why the case may be dismissed may be the debtor’s failure to provide the trustee with copies of income tax returns or failure to have filed a current tax return.
If a trustee determines that a debtor is in possession of non-exempt assets, the debtor may be required to either relinquish the property or provide the trustee with money in an amount equivalent to the value of the property. If a non-exempt piece of property has a low value or would be too troublesome to sell, the trustee may choose to abandon that property and allow the debtor to keep it even though it is technically non-exempt.

Discharging debts under Chapter 7 bankruptcy

A few months following the 341 meeting, a discharge hearing will take place, at which point all of the debtor’s unsecured debts will be discharged. What this means to the debtor is that the debts have been erased and he or she can go about the business of rebuilding credit. Secured debts such as mortgages or car loans are treated differently than unsecured debts such as credit cards. When the bankruptcy proceedings begin, the debtor elects to pay for the property, return the property to the creditor or agree upon new terms with those creditors.

Which debts must be repaid?

According to Chapter 7 bankruptcy laws, certain debts will not be erased by filing bankruptcy. After a bankruptcy discharge, the following debts will remain:

Child support.
Student loans, unless the court deems that the debtor is in a state of undue hardship.
Tax debt, unless certain criteria is met that would allow for a discharge of federal tax debt.
Debt that was accrued from fraudulent activity.

Once a debt has been discharged, the creditor no longer has any claims to that debt and cannot legally attempt to collect that debt.

What else can be done?

In a case where a person has already filed for Chapter 7 bankruptcy, then afterward determines that there is sufficient income to pay some creditors, the debtor can request that the case be handled through a Chapter 13 bankruptcy instead.
Another alternative to filing for bankruptcy is to attempt to reach an out-of-court settlement with your creditors and agree on a payment arrangement.

Pros and cons of Chapter 7

Pros of chapter 7:

The main advantage to filing for Chapter 7 bankruptcy is that it can give you a fresh start when you are no longer able to meet your obligations financially.
Bankruptcy also protects you from actions your creditors may take against you, such as lawsuits, collection actions and wage garnishees.
Chapter 7 bankruptcy will eliminate credit card debt.
The main drawback of filing for Chapter 7 bankruptcy is the long-term impact that it has on your credit score. It takes years to restore your credit following a bankruptcy.
The bankruptcy stays on your credit report for up to ten years. It will be difficult to obtain new credit, buy a car, get a mortgage or even get utility services.
When you are given credit, it will be at higher rates of interest until your credit score improves.

Cons of chapter 7

The main drawback of filing for Chapter 7 bankruptcy is the long-term impact that it has on your credit score. It takes years to restore your credit following a bankruptcy.
The bankruptcy stays on your credit report for up to ten years. It will be difficult to obtain new credit, buy a car, get a mortgage or even get utility services.
When you are given credit, it will be at higher rates of interest until your credit score improves.