Chapter 7 Bankruptcy in Questions and AnswersChapter 7 bankruptcy (also known as liquidation bankruptcy) is the type of bankruptcy that is able to give you a debt relief through selling your non-exempt property to the benefit of the creditors.
How much time and money you will have to spend on Chapter 7 bankruptcy? The process of filing for Chapter 7 bankruptcy takes 4-6 months and the net amount of collected filing and administrative fees is equal to $274. In most cases you will have to visit the court only once in order to get your bankruptcy legitimated.
Who is allowed to file for Chapter 7 bankruptcy? Chapter 7 bankruptcy can be a really powerful instrument in solving your debt-related problems but there’s one bad thing about it – it’s not allowed to be used by everyone. The people to be forbidden to file for Chapter 7 bankruptcy are:
- individuals who have already filed for bankruptcy within the last 6-8 years (depending on the type of bankruptcy you filed for the last time);
- individuals whom the court finds to be able to complete the Chapter 13 repayment plan, etc.
What forms will one have to fill in when filing for Chapter 7 bankruptcy? The documentation that you will have to deal with in the process of filing for bankruptcy includes a petition (2 pages) and several other forms. In most cases, the list of the forms includes:
- property form;
- current income and sources of income form;
- current monthly expenses form;
- debt form;
- exempt property form (exempt property is the property that the court allows you to keep to yourself – usually it is clothing, household furnishings, unspent Social Security payments, some equity items in your dwelling, a car, and other necessities);
- the form listing the property you owned and the amount of money spent by you within the course of the past two years;
- the form listing the property items you sold or gave away within the course of the past two years.
All debtors filing for Chapter 7 bankruptcy have to complete a credit counseling session and provide a certificate proving it.
It’s allowed to file out the petition only in case you will have to be going through a foreclosure or a repossession in the near future – but the rest of the forms will have to be filed within the following 15 days, with no exceptions.
What is the automatic stay? “Automatic stay” is the informal name used to refer to the so-called “Order for Relief” put into effect during the process of filing for bankruptcy. It means that the creditors do not have the right to keep on trying to collect the money you owe them any longer – namely, they can’t garnish your wages, access your bank account, take away your vehicle, dwelling or other property, etc.
In what ways can the debtor’s financial affairs be controlled by the bankruptcy court? As soon as a debtor files for bankruptcy, all the property that he/she owns and all the debts that he/she owes is passed to the bankruptcy court. He/she loses the right to sell or give any of the property he/she owns away – or repay any of his/her outstanding debts without acquiring the court’s consent first. However, in most cases this doesn’t apply to the property he/she acquires and the income he/she earns after filing for bankruptcy.
Who is the bankruptcy trustee and what is he/she is responsible for? The one to control the process of your repayment to your creditors is the “bankruptcy trustee” – a person appointed by the court. The income of a trustee is in a direct relation with the amount of assets he/she manages to recover for the creditors.
All your papers will be thoroughly examined by the trustee for him/her to make the list of your non-exempt property that can be sold to benefit the creditors. The trustee will also analyze the list of the money transactions that you have made during the previous year to see whether some of them can be canceled for the assets sent through them to be distributed among your creditors. However, it should be noticed that in most of the Chapter 7 bankruptcy cases the trustee barely finds any assets that can be sold or recovered for the creditors.
What is the creditors meeting intended for? 7 to 14 days after you file for Chapter 7 bankruptcy, the bankruptcy trustee will schedule your meeting with all the creditors you have listed in your papers. At this meeting you will be asked a number of questions about your financial situation, the bankruptcy and all the papers that you have submitted to the court. Basically, these questions are aimed at figuring out whether everything that you’ve filed is true or not. Despite their official name, these meeting are rarely attended by the creditors or their attorneys.
It most Chapter 7 bankruptcy cases, this is the only time when the debtor visits the courtroom – and this visit itself rarely lasts longer than a couple of minutes.
What happens to the property of a bankrupt debtor? The amount of non-exempt property listed by the trustee is either sold and distributed among the creditors or is kept by the debtor in case he/she manages to provide the trustee with a sum money equivalent to the value of this property. In some cases the trustee may also decide to “abandon” some part of the debtor’s non-exempt property (let the debtor keep it for free) – mostly if it is the items that are not valuable or will be extremely cumbersome to sell.
What debtor’s property may be considered exempt? Exempt property usually includes the necessities that cannot be seized neither by the bankruptcy trustee nor by the creditors. The list of the property that can be considered exempt varies from state to state. The great majority of states consider health aids, so-called “personal effects” (tooth brushes, electric shavers, hair dryers, etc), furniture, clothes, household appliances, life insurance, public benefits, etc. to be exempt (regardless of their possible value).
Some items of the debtor’s property can be considered “exempt up to certain limit”. For instance, if the exemption limit is $10,000 and your car or a furniture set costs $11,000, it will be considered non-exempt and taken away from you by the bankruptcy trustee.
In most cases, the property belonging to a debtor filing for bankruptcy is either exempt or abandoned by the trustee, so very few debtors have to surrender anything at all. The situation is quite different in secured debt-related cases (mortgage, car loan, etc), when the property purchased for the creditor’s money is considered non-exempt at all times
What about the secured debts? If some of your property is pledged collateral for a loan, it is called a “secured debt”. In case you fail to repay it in time, the creditor might want to repossess this collateral property (a house or a car in most cases). The creditor may also be able to secure a delinquent debt by having a lien on your property (according to the court’s judgment only). However, filing for bankruptcy may help you to wipe out the imposed lien.
Will all of my debts be discharged if I file for Chapter 7 bankruptcy? No, since there is a number of debts that cannot be discharged by filing for bankruptcy. The list of such debts includes:
- child support;
- great majority of tax debts;
- student loans;
- debts that cannot be discharged due to creditor’s objection (such debts may include the ones that you acquired by means of fraud or other unlawful activity).
What are the consequences of filing for Chapter 7 bankruptcy? A debtor who has already received his/her bankruptcy discharge doesn’t have to care about paying off his/her debts any longer. The financial life of a bankrupt person will no longer be supervised by the court. However, one must always inform the court if he/she receives an inheritance, insurance money or money from a divorce settlement within 6 months since the exact date he/she started filing for bankruptcy.
Chapter 7 bankruptcy will make your credit score much worse than it used to be – several years may pass until you can get a mortgage, a car loan or some other loan at a normal interest rate. Chapter 7 bankruptcy cannot be filed more often than once in 8 years.
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