Consumer Law Resource Center - Chapter 7 Bankruptcy
Bankruptcy is a legal proceeding designed to protect consumers in dire financial situations from their creditors. It allows consumers to reorganize their debt into payments they can afford or to eliminate it entirely. This tutorial covers the type of bankruptcy called Chapter 7.
Terms You Should Know
√ Debtor: The individual filing bankruptcy.
√ Discharge: The removal of the legal obligation to pay a debt.
√ Secured Creditor: A creditor who has collateral for the loan and/or a lien on the item you bought. If you don’t pay, they can take the collateral. Seen in car loans and home mortgages.
√ Unsecured Creditor: An individual or institution that lends money without obtaining specified collateral. Example: A credit card company.
√ Reaffirmation: A promise to repay a debt to a secured creditor rather than discharging the debt in bankruptcy. This option is normally requested by secured creditors in Chapter 7 bankruptcy.
√ Trustee: An appointed representative of the debtor’s bankruptcy estate.
√ Bankruptcy Estate: Property interests of the debtor at the time of the bankruptcy filing.
Chapter 7: Basics
A Chapter 7 bankruptcy, unlike other types, does not involve the creation of a payment plan. Instead, the court uses a trustee to manage and sell the debtor's assets - at least those not exempted during the bankruptcy case. Whatever proceeds result from that sale are used to pay off the creditors and "discharge" the debt. So it is important to note that filing a Chapter 7 bankruptcy may result in the loss of some property.
To be able to file for Chapter 7 bankruptcy, an individual has to either earn less than the median income for the state in which he lives or earn less than the amount derived from a complicated formula. In short, if a person's disposable monthly income amounts to around $200 per month or more, he or she will have a harder time successfully filing for Chapter 7 bankruptcy. Disposable income is the amount left over after several allowable deductions for things such as food, clothing, utilities and health care. Also factored into the formula is the person's debt load.
You cannot file for Chapter 7, or any other bankruptcy, if you tried within the last 6 months but had your case dismissed because you did not appear in court or follow its orders, or if you withdrew your case after your creditors tried in court to take property on which they held liens. Also, anyone filing for bankruptcy must go through credit counseling within 6 months of filing.
The whole point of bankruptcy is to discharge debts. And of Chapter 7 cases allowed to proceed, more than 99% end with a discharge of debt. But it's important to note that there is no absolute right to a discharge of your debts, and some debts cannot be discharged. Also, Chapter 7 does not remove any liens creditors may have on property.
Chapter 7: The Process
It begins when the debtor files a petition at the U.S. Bankruptcy Court. There are fees - $245 for filing, $39 for administrative costs and $15 trustee surcharge - but these can be waived if the debtor's income is below 150% of the federal poverty level, a figure that can be seen here.
Along with the petition for bankruptcy, the initial filing must also include the following:
- List of assets and liabilities.
- List of current income and its source and frequency.
- List of all monthly expenses.
- Statement of financial affairs.
- Schedule of contracts and leases.
- List of all creditors and the amount owed to them.
Married individuals can file for Chapter 7 independently of their spouse. But even if only one of them files for bankruptcy he or she still must report the information for the spouse.
Part of the bankruptcy process allows the debtor to exempt property from the sale the trustee holds to discharge the debt. These exemptions are allowed under federal and/or state law, so the exemptions vary by state. Talk to an attorney about what exemptions apply to you.
As soon as the petition is filed, creditors are notified and the law automatically requires them to stop most collection action. This means creditors generally aren't allowed to initiate or continue lawsuits or wage garnishments in effort to get you to pay. They aren't even allowed to call you demanding payment.
Within 40 days of the bankruptcy filing, a trustee arranges a meeting with the debtor and his or her creditors. This meeting lets the trustee and the creditors ask the debtor, under oath, about his bills and finances. Based on this meeting and the initial forms, the trustee makes a recommendation on whether the case should proceed.
Chapter 7: The Trustee & Discharge
In Chapter 7 bankruptcies, the court relies on an impartial trustee to administer the case and to sell the debtor's assets.
If all the assets are exempt - or if there are no assets - the trustee will file a "no asset" report, and the creditors get nothing. Most individual Chapter 7 cases are pursued as "no asset" bankruptcies.
In cases where the debtor does have assets, however, any unsecured creditors have 90 days to file their claims with the court. This gives them their chance at seeking payment - any payment - that can come from the asset sale. Government agencies that are owed money by the debtor have 180 days to file their claims.
In cases where the debtor does have assets, the trustee's main job is to sell off the non-exempt assets. He or she is supposed to do sell the assets for maximum payout to the unsecured creditors. These assets for sale, however, must be free and clear of any liens.
A discharge is the whole point of filing for bankruptcy: It release the debtor from his liability for most debts and keeps his creditors from taking any action against him.
Generally, Chapter 7 cases that are not dismissed or converted to other types of bankruptcy, will end in a discharge 99% of the time. It usually takes about 60 days to 90 days after the first meeting with the creditors.
Sometimes, however, cases are dismissed without discharged the individual's debts. The reasons for dismissal include:
- Failure to provide adequate records.
- Failure to satisfactorily explain any loss of assets.
- Commission of a bankruptcy crime such as perjury.
- Failure to obey a court order.
- Fraudulent transfer, concealment or destruction of property that would have been sold off.
- Failure to attend credit counseling.
Sometimes, a debtor wants to keep certain secured property, such as a car, that would normally be sold off and discharged as part of the bankruptcy. In this case, the debtor will have to decide to "reaffirm" that debt. This is a written agreement, filed in court, between the debtor and his creditor that the individual will continue to pay off the debt or an agreed-upon portion. Reaffirmation of debt can be done only BEFORE the debt discharge order is entered in court.
When the individual seeking bankruptcy protection secures a discharge of his debts, his creditors MUST cease all legal or other actions to collect the debts. Some debts, however, are difficult, if not impossible, to discharge. Among them:
- Alimony and/or child support owed.
- Certain taxes.
- School/education loans.
- Debts due to certain malicious or criminal actions by the individual, such as money owed in relation to a drunk-driving accident.