Bankruptcy

Many people considering bankruptcy simply want to understand what it is, how it works, and what it can—and cannot—do. This overview explains the basics of Chapter 7 bankruptcy.

What Is Chapter 7 Bankruptcy?

Bankruptcy is a legal process that can provide a financial fresh start by eliminating many types of debt. Chapter 7, often called "liquidation" or "straight bankruptcy," is the type of bankruptcy most people think of when they hear the term.

In a Chapter 7 case, a court-appointed bankruptcy trustee reviews your assets. If you own nonexempt property, the trustee may sell it and distribute the proceeds to your creditors. However, most Chapter 7 cases are "no-asset" cases, meaning all of the debtor's property is protected by exemption laws or has little or no value for creditors. In those cases, nothing is sold, and eligible debts are discharged.

Chapter 7 is generally the quickest and simplest form of bankruptcy, with most cases lasting about four to six months from filing to discharge.

Who Can File Chapter 7?

Chapter 7 is available to individuals, married couples, corporations, and partnerships, although the discharge rules differ for business entities.

Individuals must qualify under the Bankruptcy Code's means test, which compares household income and, in some cases, allowable expenses to determine eligibility. In general:

If your household income is below your state's median income for a household of your size, you will usually qualify for Chapter 7.
If your income is above the median, you may still qualify after applying the full means test. If not, Chapter 13 bankruptcy may be a better option.

Before filing, individual debtors must also complete an approved credit counseling course.

Because the means test can be complex, consulting an experienced bankruptcy attorney is often the best way to determine your eligibility and evaluate your options.

Filing a Chapter 7 Case

A Chapter 7 case begins when you file a petition and supporting documents with the bankruptcy court. These documents generally include:

A complete list of your creditors and the amounts owed
Information about your income and its sources
A list of your assets and property
A summary of your monthly living expenses
Additional financial information required by the Bankruptcy Code

Accuracy and complete disclosure are essential. Failing to disclose assets or debts can create serious problems in your case.

The Automatic Stay

One of the immediate benefits of filing bankruptcy is the automatic stay. As soon as your case is filed, most collection activity must stop, including:

Collection calls and letters
Wage garnishments
Most lawsuits
Bank levies
Collection actions related to discharged debts

In some situations, creditors may ask the bankruptcy court to lift the automatic stay. For example, a secured creditor may seek permission to repossess collateral or continue foreclosure proceedings under certain circumstances.

The Bankruptcy Trustee

After your case is filed, the court appoints a Chapter 7 trustee to administer your case.

The trustee reviews your bankruptcy documents, verifies your financial information, determines whether nonexempt assets exist, and, if necessary, liquidates those assets for the benefit of creditors.

Most communication during a Chapter 7 case occurs with the trustee rather than the bankruptcy judge.

Exempt Property

Bankruptcy law allows you to protect certain property through bankruptcy exemptions. Exempt property generally cannot be taken by the trustee to pay creditors.

Depending on where you live, you may use either federal bankruptcy exemptions or your state's exemption laws. Some states require debtors to use state exemptions exclusively.

Examples of property that may be exempt include:

Your home (subject to applicable homestead exemptions)
Motor vehicles (within exemption limits)
Household goods and personal belongings
Tools used in your profession
Certain retirement accounts
Social Security and many government benefits
Certain life insurance benefits
Prescription health aids

The exemptions available to you depend on your state's laws and your individual circumstances.

The Meeting of Creditors (341 Meeting)

Approximately 20 to 40 days after filing, you must attend the Meeting of Creditors, commonly called the 341 meeting.

Although creditors may attend, they rarely do. Instead, the trustee asks questions under oath to verify the information in your bankruptcy papers and ensure your schedules are complete and accurate.

You must cooperate with the trustee and provide any requested documents or additional information.

Reaffirming Secured Debts

If you want to keep property that serves as collateral for a loan—such as a vehicle—you may have several options, depending on the lender, the type of property, and the law in your jurisdiction.

One option is a reaffirmation agreement, in which you agree that the debt will survive the bankruptcy and remain your legal obligation. Reaffirmation agreements must meet specific legal requirements and, in some cases, require court approval.

Before reaffirming a debt, it is important to understand that if you later default, the creditor may repossess the property and pursue you for any remaining balance, just as if you had never filed bankruptcy.

Some debtors may also have the option to redeem certain personal property by paying its current replacement value in a lump sum.

An attorney can help you determine which option is most appropriate for your situation.

Discharge of Debts

The primary goal of Chapter 7 bankruptcy is obtaining a discharge, which permanently eliminates your legal obligation to pay many pre-bankruptcy debts.

In most cases, the discharge is entered approximately 60 to 90 days after the 341 meeting, assuming no objections are filed and all required steps have been completed.

Debts Commonly Discharged

Many unsecured debts are generally dischargeable, including:

Credit card debt
Medical bills
Personal loans
Most judgments
Deficiency balances after repossession
Business debts for individual debtors
Most lease obligations

Debts That May Be Nondischargeable

Certain debts may not be discharged if a creditor successfully objects in bankruptcy court, including debts arising from:

Fraud or false representations
Embezzlement
Certain breaches of fiduciary duty
Willful and malicious injury

These debts are not automatically excluded from discharge. In most cases, the creditor must file a timely lawsuit in the bankruptcy court and prove that an exception applies.

Debts Generally Not Discharged

Certain obligations generally survive Chapter 7 bankruptcy, including:

Most recent income taxes and certain other tax debts
Child support and alimony
Criminal fines and restitution
Debts arising from injuries caused by intoxicated driving
Most student loans, unless repayment would impose an undue hardship under applicable law
Certain debts that were not properly listed in the bankruptcy case
Certain debts previously determined to be nondischargeable

Objections to Discharge

In rare cases, the trustee or a creditor may object to a debtor's discharge or seek to revoke a discharge after it has been granted.

Common grounds include:

Concealing assets
Making false statements under oath
Destroying or withholding financial records
Fraudulent conduct during the bankruptcy case

Honest and complete disclosure is one of the most important responsibilities of every bankruptcy filer.

Is Chapter 7 Right for You?

Chapter 7 bankruptcy can provide meaningful relief from overwhelming debt, but it is not the right solution for everyone. An experienced bankruptcy attorney can evaluate your financial circumstances, explain your options, and help you determine whether Chapter 7 or another form of debt relief best fits your goals.

With proper planning and legal guidance, Chapter 7 can provide the fresh financial start that Congress intended.

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