A Guide to Chapter 7 Bankruptcy

Liquidation bankruptcy

Most people assume that if they file for Chapter 7 bankruptcy relief, they will lose their property. This assumption probably comes from the fact that a Chapter 7 bankruptcy case is referred to as a “liquidation bankruptcy.” What people fail to realize is that that majority of Chapter 7 bankruptcies are “no asset cases” meaning that the debtor does not lose any of his or her property. So why is Chapter 7 called a liquidation bankruptcy?

The Chapter 7 Trustee

When you file a Chapter 7 bankruptcy, a bankruptcy trustee will be appointed to your case. His job is to review the information you filed and to find assets that he can liquidate to pay your unsecured creditors. However, before the trustee can liquidate any property, he must first determine the value of the property for the bankruptcy estate. The first step is to determine the market value of the property (this is provided by the debtor in his schedules and verified by the trustee). From the market value, the trustee must subtract the payoff of any secured liens and the exemptions claimed by the debtor. Each debtor can claim various exemptions in assets that protect the equity in the asset from creditors and the trustee up to the dollar amount of the exemption. In most cases, once the trustee subtracts any secured liens and the claimed exemptions from the market value of the asset, there is no equity for the bankruptcy estate. Therefore, the trustee will abandon the assets and declare the case to be a “no asset” case. This is why most people who file Chapter 7 do not lose any of their assets.

How does Chapter 7 help me solve my debt problems?

The first thing a Chapter 7 bankruptcy case will do for you is remove the stress and anxiety of dealing with creditors and debt collectors. If you live in fear of your mailbox or telephone because debt collectors are harassing you, filing bankruptcy stops creditor harassment. When your Chapter 7 bankruptcy case is filed, an automatic stay goes into effect and continues for the pendency of your case unless modified by the court. This automatic stay prevents creditors and bill collections from initiating or continuing collection efforts. This means a stop to the threatening letters and harassing telephone calls. Creditors are prohibited from filing lawsuits to seek judgments after the bankruptcy case is filed.

Once your bankruptcy case is completed, most, if not all, of your debts will be discharged. You will no longer be legally liable for the repayment of these debts. There are a few exceptions to this general rule such as child support, alimony, taxes and student loans. However, your credit card debt, medical bills, personal loans and cash advance loans will be discharged through your Chapter 7 bankruptcy case. You may choose to retain assets that are pledged as collateral for debt by continuing to pay the monthly payments under the contract or you may choose to surrender the asset and owe nothing more to the creditor. For example, if you want to keep your home and your car, you continue making those payments as they come due each month.

What happens in a typical Chapter 7 case?

Within 180 days before the filing of a Chapter 7 case, the debtor must first complete a credit counseling course. A certificate certifying that the course has been completed must be filed with the debtor’s petition. A Chapter 7 bankruptcy case begins with the filing of a voluntary petition. In addition to the petition, debtors are required to file schedules and statements that provide information about their assets, liabilities, income, expenses and financial history. In order to be eligible to qualify for Chapter 7, you must meet the income requirements of the means test. Your income for the past six months will be averaged and compared to the median income of families in your area. If your income is below the median income, you can proceed with the Chapter 7 case.

Debtors should complete the required financial management course prior to their hearing date. This is not a requirement; however, must attorneys recommend that the debtor complete the course so that the certificate of completion can be filed prior to the first hearing or immediately thereafter. The financial management course is very important because the debtor’s discharge will be denied if he does not complete this course and file the certificate with the court. In other words, the debtor’s creditors can still pursue him for payment of the debt even though he filed bankruptcy. Therefore, it is vital that the debtor complete the course as soon as possible after the case is filed.

After your case is filed and a trustee is assigned, the court will schedule the First Meeting of Creditors. This hearing is conducted by the trustee who asks the debtors questions under oath about their assets, income, expenses and financial history. Creditors may also appear to ask questions; however, this is rare. After the First Meeting of Creditors, creditors have 60 days to object to discharge. Provided there are no objections and the trustee declared the case to be a no asset case, the debtor will receive a discharge. This allows the debtor to receive a fresh start so that he can begin to recover and rebuild after suffering a financial crisis.