How Chapter 7 bankruptcy works.
Chapter 7 bankruptcy is sometimes called "straight" or "liquidation" bankruptcy - it cancels your debts. On rare occasions you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors. ("Chapter 7″ refers to the chapter of the federal Bankruptcy Code that contains the bankruptcy law.)
Chapter 7 Bankruptcy Costs in Time and Money
The whole Chapter 7 bankruptcy process takes about four to six months. A typical flat fee bankruptcy costs (including filing fees and gross receipts tax) between $1195 and $1495 total, no hidden costs or unpleasant surprises, and commonly only requires one trip to the courthouse.
You must also complete credit counseling with an agency approved by the United States Trustee.
Who Can File
You won't be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last eight years or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan.
To file for Chapter 7 bankruptcy, you fill out a petition and a number of other forms and file them with the bankruptcy court in your area. Basically, the forms ask you to describe:
- your property
- your current income and monthly living expenses
- your debts
- property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called "exempt property") - most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven't spent, and other necessities such as a car and the tools of your trade.
- property you owned and money you spent during the previous two years, and
- property you sold or gave away during the previous two years.
Bankruptcy's Magic Wand - The Automatic Stay
Filing for Chapter 7 bankruptcy puts into effect an "Order for Relief" - known informally as the "automatic stay." The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab ("garnish") your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits.
The Creditors Meeting
A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a "creditors meeting" has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 bankruptcies, this is the debtor's only visit to the courthouse.
What Happens to Your Property
Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As result, few debtors end up having to surrender any property, unless it is collateral for a secured debt (see below).
How Your Secured Debts Are Treated
If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you're behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before - unless you have enough equity in the property to justify its sale by the trustee.
If a creditor has recorded a lien against your property because of a debt you haven't paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy.
The Chapter 7 Bankruptcy Discharge
At the end of the bankruptcy process, all of your debts are wiped out (discharged) by the court, except:
- debts that automatically survive bankruptcy, such as child support, most tax debts, and student loans, unless the court rules otherwise, and
- debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).