What is a Chapter 7 bankruptcy?

Chapter 7 in the U.S. bankruptcy code, also known as a “liquidation,” “straight bankruptcy,” or “fresh start bankruptcy,” controls the process of asset liquidation. Filing for Chapter 7 bankruptcy wipes out most types of unsecured debts, including credit card debt, medical bills, and personal loans. This effectively releases you from any personal liability for payment.

How Does Chapter 7 Bankruptcy Work?

When you file for Chapter 7 bankruptcy, the court puts an automatic stay into effect on creditors; preventing them from attempting to collect any payments from you. Creditors are no longer able to turn off your utilities, evict you, foreclose on your home, reposses property, or garnish your wages. 

The court then appoints a trustee to examine your assets and liabilities and take legal possession of your non-exempt property. Any non-exempt assets will be liquidated and the proceeds will be used to pay your creditors. Unsecured priority debts, such as child support, tax debts, and any personal injury claims, are paid first. Secured debts are paid next. Any funds remaining from the liquidation of assets will be used to pay nonpriority, unsecured debts. If there are not sufficient funds to pay the nonpriority unsecured debt, then the debts are paid on a pro-rata basis.

This doesn’t mean you will lose everything you own if you file for chapter 7 bankruptcy. In fact, in the majority of chapter 7 cases, most if not all of the property owned by the debtor is exempt under state law and debts are simply “discharged” or eliminated.

Who is eligible to file for Chapter 7?

In order to file a Chapter 7 bankruptcy case, you must reside in, have a business in, or own property in the United States and you must qualify under the means test.

Exceptions include:
  • Individuals who have had a prior bankruptcy case dismissed within the last 180 days, under specific circumstances
  • Individuals who completed a Chapter 7 in the past eight years or a Chapter 13 bankruptcy within the past six years.

The means test determines whether you have enough disposable income to repay your debts by considering your income, assets, expenses, and family size. This process is used to restrict the number of filers and identify those who might be able to partially repay what they owe through other means. Most people who take the means test meet the qualifications.

How to File for Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy is a complicated process and should not be taken lightly. It’s important to consult with a professional to understand your options.

  • Credit Counseling – A filer must first complete credit counseling from a qualified nonprofit agency within six months before beginning the Chapter 7 bankruptcy process. 
  • Hire an attorney – Although it’s possible to without the assistance of an attorney, it is not recommended. Filing for bankruptcy is a complex process and any missing or improperly completed paperwork can lead to your case being thrown out or not having some debts dismissed.
  • File appropriate paperwork – Your attorney will assist with the application and filing process to begin the official Chapter 7 proceedings.You are responsible for gathering any relevant documentation of your assets, income and debts. 

At this point, the bankruptcy court will appoint an unbiased trustee to oversee the entire bankruptcy process. The bankruptcy trustee will then:

  • Review your personal assets and finances. 
  • Arrange a meeting between you, your attorney and your creditors to review your bankruptcy forms and finances. 
  • Determine your eligibility.
  • Handle the liquidation of any non-exempt assets, if applicable. 
  • Resolve any remaining debts. 

Once the process is complete, your case will be discharged, meaning that eligible debts are forgiven. Typically, this happens within three to six months after filing your petition. Shortly thereafter your case will be closed.

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