The most common type of bankruptcy filing is Chapter 7. The goal of filing a Chapter 7 case is to obtain a Court Order known as the automatic stay, which stops – or stays – the collection efforts of your creditors; and a second Court Order known as the Discharge of Debtor, which relieves you of your personal liability for your dischargeable debts.
Here is a general overview of how the Chapter 7 process works. This general overview should not be taken as legal advice to you, since simply reading a website does not make you a client of this law office.
- Before you can file bankruptcy, you must complete a course on consumer credit counseling.
- A bankruptcy petition must be prepared, and the petition must disclose your assets, income, debts, expenses, and your financial affairs. You must sign the petition under the penalty of perjury. If you get caught making false statements, such as not disclosing an asset, then you may be prosecuted for committing the crime of bankruptcy fraud.
- When the petition is filed, the Court issues an Order known as the automatic stay, which stops – or stays – the collection efforts of your creditors. Even if a creditor has obtained a judgment against you, and is trying to garnish your wages or take money right out of your bank account with a levy, the automatic stay still stops your creditors.
- Filing a Chapter 7 petition also creates a bankruptcy estate, which is administered by the Chapter 7 Trustee. All assets [with some exceptions, such as a 401k plan], become the assets of the bankruptcy estate. Most people can apply exemptions in order to claim most or all of their assets as exempt from the bankruptcy estate. However, if you do have a valuable asset that cannot be claimed as exempt, then the Chapter 7 Trustee will want to sell – or liquidate – that asset in order to use the proceeds of sale to pay dividends to your creditors. If you want to keep the asset that the Chapter 7 Trustee wants to liquidate, then you will have to pay the Chapter 7 Trustee in order to buy back that asset from the Chapter 7 Trustee.
- About 30 to 40 days after the Chapter 7 petition is filed, you must attend the Meeting of Creditors. Your attendance is mandatory. You must also bring a current, government-issued photo ID such as your driver’s license; as well as proof of your Social Security Number, such as your social security card or a W-2 statement. At the Meeting of Creditors, the Chapter 7 Trustee will question you about your assets, income, debts, and financial affairs.
- Within 45 days after the first date scheduled for the Meeting of Creditors, you must complete an educational course on financial management.
- The Chapter 7 Trustee, the United States Trustee, and your creditors, have a deadline of 60 days from the first date set for the Meeting of Creditors to file a complaint or an objection against you for some alleged wrongdoing.
- If your case is a clean one, then the case comes to an end after 60 days have passed since the first date set for the Meeting of Creditors. Then you get a Court Order that relieves you of your personal liability for your dischargeable debts.
Some debts, however, are not discharged in a Chapter 7 case, such as recent income tax debts. Furthermore, if a debt is secured by collateral, such as a car loan or a home loan, then even after receiving your discharge, the creditor can still sell the collateral through repossession or foreclosure if the debt is not paid.
You might not be eligible for Chapter 7 if your income is too high above the average income for your household size. Also, filing Chapter 7 may not be a good idea if you have valuable assets that you want to keep. As explained above, the Chapter 7 Trustee will want to sell – or liquidate – your valuable assets.
Since filing Chapter 7 is not always the best idea, you may need to consider filing Chapter 13. The person who files Chapter 7 and then realizes that he or she made a mistake, may not be able to change his or her mind and just dismiss the bankruptcy filing. Such a Chapter 7 debtor may find himself or herself at the mercy of an aggressive Chapter 7 Trustee who will oppose the debtor’s attempt to try to dismiss a Chapter 7 case.