Chapter 7 bankruptcy – Discharge your debts legally

Chapter 7 of Title 11 of the United States Bankruptcy Code governs the process of liquidation under the U.S. Bankruptcy Laws. Chapter 7 is the most widespread method of bankruptcy filing in the US.

In a Chapter 7 bankruptcy, the court appointed trustee may cancel many or all of your debts. However, he can also sell (liquidate) some of your assets to make payments toward your creditors. Below provided is an outline of Chapter 7 bankruptcy filing - the eligibility criteria, the various forms needed, the complete filing procedure, and the most importantly - the bankruptcy law amendment in 2005.

• Chapter 7 Bankruptcy costs & timeline
• Eligibility for filing
• Bankruptcy Forms
• Automatic stay - The magic wand
• Role of the bankruptcy trustee
• Creditors Meeting
• What Happens to Your Property
• How Secured Debts Are Treated
• Chapter 7 Bankruptcy Discharge
• Bankruptcy law amendment of 2005

Chapter 7 bankruptcy costs & timeline

Chapter 7 bankruptcy filing is relatively not that much expensive. It takes around four to six months for the whole Chapter 7 process to complete, costs $306 for filing (as of November 1, 2011) and administrative fees. There are also some other costs associated, including appraisal fees if you own real estate, title search charges, pre-filing credit counseling and post-filing course on financial management.

Eligibility for filing

If you have already received a bankruptcy discharge in the last six to eight years (depends on the type of bankruptcy you filed), if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days, if you have enough income to feasibly satisfy a Chapter 13 plan, or if the bankruptcy court finds that you have tried to cheat your creditors or concealed your assets, then you won’t be able to file for Chapter 7 bankruptcy discharge.

Bankruptcy forms

In order to file Chapter 7 bankruptcy, you need to fill out a petition and a number of other forms. The forms basically ask you to describe:

• Your property
• Your present monthly income and expenses
• Your present debts
• Your exempt property
• Property that you owned and money that you spent during the last two years, and
• Property you sold or handed over during the last two years

Automatic stay - The magic wand

If you file Chapter 7 bankruptcy, it immediately puts into effect an ‘Order for Relief’ - informally known as the ‘Automatic Stay’. Once you file for Chapter 7, this automatic stay immediately stops all collection activities on the accounts. So for the time being (until the judgment is made), creditors cannot garnish your wages, empty your savings or current account, go after your house, car or other property.

Role of the bankruptcy trustee

In Chapter 7 bankruptcy cases, the bankruptcy court exercises its complete authority over the cases through a person called the ‘bankruptcy trustee’. A bankruptcy trustee’s primary duty is to make sure that the creditors’ interest is taken care of. The trustee works hard in order to pay back the creditors as much as possible by liquidating your assets, and the more assets the trustee recovers from you, the more the trustee is paid.

The bankruptcy trustee or the associates examine your papers to make sure nothing is wrong with them and look for nonexempt property in order to sell them and pay off your creditors. The trustee also goes through the financial transactions that you made during the previous years. The purpose of doing this is to free up assets and distribute the valuation among your creditors by liquidating them.

Creditors meeting

One or two weeks after the filing, you and your creditors receive a notice from the bankruptcy court stating that a ‘creditors meeting’ has been scheduled. The bankruptcy trustee solely conducts the meeting, and once you swear in, may ask you questions regarding your assets and the papers you have filed. For the meeting, the trustee may ask you to bring things like copies of your mortgage papers, car titles, latest bank statements, property deeds, tax returns and paychecks. In the vast majority of Chapter 7 bankruptcy cases, this is perhaps the only visit to the courthouse that a debtor’s make.

What happens to your property

If the bankruptcy trustee determines that you have some nonexempt property, you are required to either yield that property or provide the trustee with its equal value in cash. However, if the value of the property is not enough to pay off the debt or troublesome for the trustee to sell, the trustee may abandon the property. This means that even though the property is nonexempt, you can keep it. However, list of exempt and nonexempt property varies from state to state. Find details of exempt and nonexempt property in the US State Bankruptcy Laws.

How Secured Debts Are Treated

If you have some secured debts (those which you have obtained by placing collaterals), and if you are behind on your bills, the creditor may ask the court to raise the ‘automatic stay’ in order to repossess or foreclose on your property. On the contrary, if you are paying your bills on time, you can keep your property and go on making the bills as before.

Again, if a creditor has imposed a lien in your property as of the debt, which you haven’t paid yet, the debt will be taken as secured. However, if you file for Chapter 7, you may be able to remove the lien.

Chapter 7 Bankruptcy Discharge

Once all the bankruptcy procedures are complete, the court wipes out all your debts, except:

• Debts that can’t be discharged in bankruptcy (child support, most tax debts, and student loans), unless the court’s verdict goes otherwise, and
• Debts that the court declares as nondischargeable because of protest from the creditor’s end (debts incurred by fraud or other scams).

Bankruptcy law amendment of 2005

On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) came into effect. After the legislation of 1978, this was the biggest amendment to the US Bankruptcy Code. One of the major purposes of this amendment was to prevent abuses of the bankruptcy laws. Some of major changes that took place are as followed:

1. Means test: Debtors filing for Chapter 7 bankruptcy are required to fill out the Official Bankruptcy Form, 22A. This form is specifically meant for ‘means test’ where you need to provide information regarding your monthly income and expense.
   
   The main purpose of ‘means test’ is to determine whether or not your income is low enough for you to file Chapter 7 bankruptcy. Means test is nothing but a formula designed to keep filers with high income from filing Chapter 7 bankruptcy. However, this in anyway, does not mean that you have to be bankrupt in order to qualify for Chapter 7. Rather, you can have significant monthly income and still pass the ‘means test’ if you have high expenses, such as huge mortgage payments.
2. Credit counseling: ‘Eligibility to file’ is another section of the law that the BAPCPA changed drastically. As per the changed legislation, no debtor is eligible to file for Chapter 7 unless the debtor receives ‘an individual or group briefing’ from a nonprofit credit counseling agency approved by the United States Trustee, Dept. of Justice within 180 days prior to filing. Again, the debtor should complete an “instructional course concerning personal financial management’’. Not doing thus may comprise grounds for rejection of discharge.

Additional Resources

• Chapter 7 Vs Chapter 13
• Recent Changes to Bankruptcy Law
• how to file for bankruptcy
• Bankruptcy Filing Fees
• The Automatic Stay
• The 341-Meeting
• How to rebuild your credit score after bankruptcy?
• Faqs on Bankruptcy
• Bankruptcy Terminologies

US State Bankruptcy Laws