A Chapter 7 is a liquidation that involves the discharge or elimination of unsecured debt. In most cases, all of a debtor’s assets are exempt from being seized and being sold by the trustee.
Upon filing, a Chapter 7 imposes an automatic stay on all civil proceedings, including collection activities, wage garnishments, and foreclosures, although mortgage lenders can obtain a court order lifting the stay as it applies to them. Creditors can no longer contact you once you have filed.
A bankruptcy chapter 7 can be used by consumers and businesses wishing to unburden themselves of crushing debt and to give them a “fresh start.”
The Means Test
Not all debtors can use a bankruptcy chapter 7 proceeding. To qualify, debtors must meet a means test. All states and counties have a median income level. If your income exceeds the median amount, you then must determine if your disposable income is below a certain amount.
Disposable income is determined by subtracting your reasonable monthly expenses and payments to secured creditors, such as mortgage and auto lenders, from your gross income. If you fail to qualify, you still might qualify to file a Chapter 13 provided you also meet those eligibility requirements.
If you do qualify, you then must take a credit counseling course. This can be taken online or even over the phone. Many bankruptcy law firms provide this service to clients. The course must be taken within 180 days of filing your bankruptcy chapter 7.
Listing of Debts and Assets
Your petition must include the names, addresses, account numbers, and amount owing to everyone you owe, regardless of their relationship to you. You cannot omit anyone as this is perceived as favoring a creditor over others.
The market value of your assets must be listed as well. Documentation is usually required to prove the value of larger items such as cars, houses, jewelry, or large collections.
All debtors are entitled to certain exemptions subject to either their state’s limits or the federal limits if applicable. You can retain property up to a certain value, otherwise the value above that is nonexempt and subject to sale by the trustee. Each state has a certain exempt value on homesteads with some states allowing an unlimited exemption.
Autos, tools of a trade, and other items have limited exempt values, although a trustee may choose not to sell a nonexempt item if the cost of sale would equal or exceed the property’s value.
In some cases, nonexempt property may be converted to exempt property. Examples of nonexempt property are second homes or a second or third vehicles.
Unsecured debt such as credit card amounts, unsecured loans, court judgments, some taxes, and medical bills are dischargeable. Student loans and most tax liabilities are generally not dischargeable. Court fines are not dischargeable nor are judgments in a fraud or intentional injury case.
About 4 months after filing your bankruptcy chapter 7, attending your Section 341 Meeting, or First Meeting of Creditors with the trustee, and completing a financial management course (typically lasting only a few hours), and no creditor has filed an objection to your discharge of debts, you will receive a court notice formally discharging your debts.