Chapter 7 Bankruptcy
Bankruptcy is a process offered by the Federal Courts to help people who have become overwhelmed by debt get relief. Some years ago, many people made a habit of getting deep into debt with credit cards, then they would file bankruptcy and simply walk away from it all. In 2005, the federal government changed the way that bankruptcy works so that people could no longer abuse the system.
If you are considering bankruptcy for the first time, you have probably heard that there are different types. Individuals, businesses, corporations, and farmers are all eligible to file bankruptcy. Chapter 7 is the bankruptcy that is often referred to as liquidation. Chapter 7 bankruptcy is available to individuals as well as business persons.
Before you are able to file Chapter 7 bankruptcy, the court will look at your income to see whether it is higher than the median in your state. If it is, the court will next consider whether your monthly income over the past five years is excessive. If either is true, you will not be allowed to file bankruptcy.
How It Works
Chapter 7 allows the court to sell all of your nonexempt assets. The funds from those assets are then used to pay your creditors. Everything is liquidated except for a few exempt items. This system is designed to give you complete relief from debt so that you can have a fresh start.
As soon as you file the bankruptcy petition with the court, creditors will no longer be able to initiate lawsuits, garnish your wages, or call you on the telephone asking for payment. The court will appoint a trustee to handle your case. Within 40 days after you file the petition, a meeting of creditors is held. The meeting is a chance for the trustee and creditors ask questions of the debtor about his or her financial affairs. It is very important that you attend this meeting and provide all the information you can.
The Bankruptcy Code outlines six different classes of claims. Each class has to be paid in full before the next class can be paid. The order in which these debts are paid are not at your discretion; the trustee simply follows the correct order until all the debts have been settled.
After liquidating and distributing assets, a discharge may be granted. This releases you from personal liability for most of your remaining debt, and prevents creditors from taking further action. You do not automatically receive a discharge; your case could be dismissed or converted or denied.
In order to file bankruptcy, you need to visit your local branch of the US Bankruptcy Court. They will require that you fill out a petition and provide certain paperwork, including:
- A schedule of assets and liabilities
- A schedule of income and expenditures
- A statement of financial affairs
- A schedule of executory contracts and unexpired leases
- A copy of your most recent tax return
If you are filing as an individual and most your debt is credit card or other consumer debt, you must also provide the court with:
- A certificate of credit counseling
- A copy of any debt repayment plan that you created during the credit counseling
- Pay stubs
- A net income statement
- A list of any anticipated change in income or expenses
- A record of your interest in federal student loans.
The fees for filing Chapter 7 bankruptcy are as follows:
- $245 case filing fee
- $39 miscellaneous administrative fee
- $15 trustee surcharge.
The fees must be paid up front, although sometimes the court allows the fees to be paid in up to four installments. If your income is less than 150% of the government determined poverty level, and you cannot pay your fees in installments, you may receive a fee waiver.
Why Might the Court Deny My Discharge?
The court does not have to wipe your debt clean just because you ask them to. In a few cases they will deny the discharge of debts. It can happen if you have not provided them with accurate financial information, if you could not explain your loss of certain assets, if you commit a crime or commit fraud, or if you fraudulently keep property back that would have otherwise been a part of your bankruptcy case.
After the Discharge
Once your case has been filed and the meeting of creditors has taken place, the court will decide whether to discharge your debt. You will then sign off on the debts, or in some cases you will reaffirm a debt and agree to continue making payments on it. 60 to 90 days after the hearing, your debt will be discharged. Although the bankruptcy will remain on your credit record for 7 to 10 years, you are able to start over debt-free.
What Debt Will Not Be Discharged?
Certain kinds of debt will not be liquidated under Chapter 7 bankruptcy. Among those are:
- Child support
- Student loans
- Government loans
- Debts taken maliciously
- Debts for criminal restitution, including DUI
- Debts for fraud
Bankruptcy is a serious undertaking. Before making a decision to file, consider visiting a US court approved credit counselor, and also consult with your attorney.