Chapter 7 bankruptcy is the most common form of bankruptcy debtors file in the US. If you have minimal to no assets, then Chapter 7 is probably the right choice for you. The entire process usually can be accomplished in 4-6 months. Chapter 7 is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships.
A Chapter 7 bankruptcy, also known as a “liquidation” bankruptcy, erases all debt that is legally capable of expungement. In Chapter 7 bankruptcy, the bankruptcy trustee cancels many (or all) of your debts. At the same time it might also sell (liquidate) some of your property to pay your creditors.
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. If your income is above the jurisdication’s median, the bankruptcy court will require the you to pass a “means test” in order to establish eligibility for Chapter 7. The means test prevents filers with the ability to repay creditors from discharging debt that they could potentially pay. The means test assesses the debtor’s income and expenses from the preceding six months. If the debtor has a certain amount of income leftover every month after expenses, the debtor will fail the means test. Although the debtor is ineligible for Chapter 7, Chapter 13 may still be a good option.
You will also be required to complete a credit briefing session before filing your chapter 7 bankruptcy petition. Learn more about the Bankruptcy process here.
How to File for Chapter 7
Upon completion of credit-counseling, the debtor can file for bankruptcy. As part of the petition filing, a debtor is required to provide information about income, debt, expenditures, creditor holdings of secured and unsecured debt, the sale of prior property, and a list of exempt property. Exempt property is 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 Role of the Trustee
The bankruptcy court appoints a trustee for each bankruptcy case. The trustee is responsible for overseeing the case ensuring that the debtor files the appropriate documents. The trustee must also determine whether the sale of nonexempt property will produce enough income to pay creditors. If property is unlikely to generate substantial compensation in comparison with the time and effort needed to sell the property, the trustee will likely allow the debtor to keep the nonexempt property.
Your Debts Go Away Even if You Have No Property to Liquidate
If you have no property that the trustee can sell after your exemptions have been applied, Chapter 7 bankruptcy will still erase most of your debts. Chapter 7 cases are often called “no-asset bankruptcies” for just this reason. Certain debts, such as child support, can’t be discharged at all, even if you declare bankruptcy.
Going to Court
Most chapter 7 debtors are only required to appear in court once, at the first meeting of creditors (also called the § 341 meeting from the section of the Code that describes the meeting.) To learn more about the Bankruptcy process click here.
At the meeting of creditors, the trustee can ask the debtor questions under oath about assets and liabilities. Creditors also have a right to question the debtor on those subjects, but seldom appear at these hearings.
After the Meeting of Creditors
If there are assets which are not exempt the trustee takes control of those assets. From the sale of assets or the recovery of avoidable transfers, the trustee pays the expenses of the administration of the case, then distributes any remaining funds to creditors with allowed claims, according to the priority of the claims.
Any wages the debtor earns after the case is begun are the debtor’s, beyond the reach of creditors who had dischargeable claims on the date of filing.
Generally, the only responsibilities the debtor has with respect to the bankruptcy after the 341 meeting is to cooperate with the trustee in providing any information requested by the trustee.
Getting your Discharge
Creditors and the trustee have a 60 day period from the 341 meeting in which they may challenge the debtor’s right to a discharge by filing an adversary proceeding. Unless such an action to deny the debtor a discharge is filed, the order providing for the discharge of debts is issued by the court shortly after the 60 day period expires.
The entire chapter 7 process normally takes just 4-6 months.