Bankruptcy - What is Chapter 7?
Chapter 7 bankruptcy is liquidation bankruptcy. In order to file for Chapter 7 bankruptcy an individual is required to pass what is known as a “means test”.
The means test is used by the bankruptcy courts to determine if you qualify for Chapter 7 bankruptcy.
The means test uses your average income for the six previous months prior to filing for Chapter 7 bankruptcy.
If this average is below the median income for the state then Chapter 7 may be an option; if not the test continues weighing other variables to determine qualification.
In addition to passing the means test, the person filing for bankruptcy must not have had a bankruptcy case dismissed due to “willful failure to appear” during a previous bankruptcy case or failed to comply with court orders in a previous case.
Also the person filing for Chapter 7 must have received credit counseling from an approved agency in either a private meeting or a group setting.
Once qualification has been determined through the means test the bankruptcy case will move forward.
As stated at the beginning of this document Chapter 7 bankruptcy is “Liquidation” bankruptcy.
This means that there will be no repayment plans like you would have in Chapter 13.
Liquidation means that all nonexempt property or property that the court has not allowed you to keep will be liquidated to pay-off creditors in accordance with the bankruptcy rules.
This liquidation is done by a trustee of the court that is assigned to the case from the outset.
Filing for Chapter 7 Bankruptcy
When an Individual Files for Chapter 7 Bankruptcy they must file the following:
1. A Schedule of Assets and Liabilities
2. A Schedule of Expenditures and Current Income
3. Your Statement of Financial Affairs
4. A Schedule of Unexpired Leases and Executory Contracts
Individual debtors with primarily consumer debt must also file the following:
1. Certificate of Credit Counseling
2. Debt Repayment Plan (If one was developed during credit counseling)
3. Proof of Employer Payments (if any) Within 60 Days of Filing
4. Monthly Income Statement
5. Statement of Anticipated Income Increases or Expenses After Filing
6. Record of State or Federal Tuition Accounts
7. A Married Couple may File a Joint or Individual Petition
These forms are available at http://www.uscourts.gov/bkforms/index.html.
How Much Does Chapter 7 Bankruptcy Cost? The court charges $245 to file a bankruptcy case; this is called a “filing fee”. In addition there is a $39 administrative fee and a $15 surcharge called a “Trustee Surcharge”. In most cases these payments are due when you file your case, however a debtor may ask the courts permission to make payments to cover the costs of filing for bankruptcy. If the debtor meets certain financial criteria, the fees may be waived by the court.
Chapter 7 Forms During the filing process a debtor must fill out the official bankruptcy forms. The following information will be necessary:
1. A list of the Creditors (the people or institutions that you owe money to) and what their claim is.
2. Your income sources, how often you get paid and how much you get paid.
3. A list of the property that you own.
4. A comprehensive list of your living expenses including food, rent, mortgage etc...
If the person filing for bankruptcy is married they must include income and expense information about their spouse even if they are not filing a joint petition.
Chapter 7 - Debtor Responsibilities A debtor is also required to complete a schedule of the property that is exempt. This is property that you will be allowed to keep (if allowed by state or federal law). The allowances for exempt property vary from state to state and may also vary between state and federal law. Therefore it is imperative that the debtor either educate themselves about the exemptions in their state or hire a bankruptcy attorney to be advised of their legal rights in the state that they live in.
Chapter 7 Creditor Actions After an individual files for Chapter 7 bankruptcy most creditor actions such as law suit initiation, repossession of property, collections phone calls and other common creditor procedures will cease under the bankruptcy law. The creditors will be notified by the bankruptcy clerk and will be allowed to attend a meeting with the debtor to answer questions regarding the debts. The debtor is required to attend this meeting and answer the questions from the creditors and the trustee regarding financial matters that must have been illuminated in the filing forms.
Chapter 7 Trustee The case trustee is appointed by the U.S. trustee in most cases and is responsible for the impartial administration of the bankruptcy case. The trustee will be the individual who liquidates all non-exempt property owned by the debtor. In many cases the debtor has no nonexempt property and the trustee will file a no-asset report with the bankruptcy court.
Chapter 7 - The Bankruptcy Estate When a Chapter 7 bankruptcy case is officially underway there is an “Estate” created. This estate is where all of the debtor’s assets are placed during the course of the bankruptcy case. The nonexempt property within this estate (if any) is liquidated by the trustee and distributed to the creditors in accordance with the rules of the bankruptcy court.
Chapter 7 - Discharge As the debtor in a Chapter 7 bankruptcy case, your main concern will be the “Discharge” of the case. This discharge essentially rids the debtor of the personal liability for most of the debts owed. In addition, the creditors by law are not permitted to take any type of action against the debtor for debts not paid. There are exemptions however and a debtor would be well advised to seek legal guidance prior to filing for bankruptcy to determine what debts may be discharged and what debts may be secured by creditors. In most Chapter 7 bankruptcy cases the debtor will receive a discharge within 90 days of the creditors meeting, but if it is discovered that the debtor has hidden assets, committed perjury or committed any type of bankruptcy fraud the debtor will be denied discharge and may face criminal charges.
Chapter 7 Information In Chapter 7 bankruptcy, all debts may not be discharged. Examples of these are secured loans, child support, and certain taxes, debts for settlements in death or personal injury settlement and more. Clearly the advice of legal counseling is recommended if the debtor has any type of “questionable” debt.
The description above is not a comprehensive legal definition of Chapter 7 Bankruptcy, but rather an informal description of the term and how it may be used in a case involving bankruptcy.
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