By selling off assets, Chapter 7 bankruptcy eliminates the majority of the debt. A trustee is chosen by the court to manage the case. The trustee's duties include:
- Seizing control of the debtor's assets.
- Selling them.
- Paying the proceeds to the debtor's creditors.
Chapter 7 Bankruptcy: An Overview and Example
In the United States, Chapter 7 bankruptcy filings are the most frequent. The trustee seizes your property and sells it in accordance with bankruptcy laws and regulations to raise cash to settle your debts. Perhaps you own a second vehicle that you don't use to travel to work. It is a luxury to have it. It is worth $6,000 and has no loans attached to it. It will be sold by the trustee, who will then distribute the proceeds to your creditors. A Chapter 7 bankruptcy filing can help you start over financially, but it will remain on your credit report for ten years. Alternative names include liquidation bankruptcy and straight bankruptcy.The Process of Chapter 7 Bankruptcy
The trustee cannot take everything you own and sell it; creditors must submit valid claims before receiving payment for your debts. So that you won't lose everything you need to survive, you are allowed to keep some "exempt property." You must gain ground. Certain kinds of property are subject to exemptions. Many states also have their lists of exemptions in addition to the federal government's list. In some of these jurisdictions, debtors must use the state's list. When given the option to select between their list and the federal list, as in some states, debtors can choose the set of exemptions that will benefit them the most. Typical exclusions include:- Residence/homestead
- Car
- A few retirement accounts
- Real estate required for daily living
Comparing Chapters 7 and 11 of bankruptcy
Bankruptcy filings can take many different forms. It's crucial to pick the solution that will work best for you and your financial situation going forward. The main distinctions between Chapter 7 and Chapter 11 bankruptcy should be noted. Chapter 7 Bankruptcy Chapter 11 Bankruptcy Referred to as "liquidation" or "straight" bankruptcy Referred to as "reorganisation" or "rehabilitation" Individuals use it more frequently to help pay off debts Businesses use them more frequently to help pay off debts while carrying on with operations. Typically, the procedure lasts four to six months. A process might take years.Chapter 7 Bankruptcy Filing Requirements
Assemble all of your financial documents, such as paystubs, credit card statements, bank statements, and loan paperwork. You will require this information to complete the petition, schedules, statement of financial affairs, and other documents you must file with the court. These documents are available for free download from the U.S. Courts website. The voluntary petition for relief, asset and liability schedules, debtor education declarations, and a statement of financial affairs are all included in Chapter 7 paperwork. They contain a list of every item you own and your debts, creditors, income, expenses, and property transfers. Your local bankruptcy court clerk will receive everything that you or your attorney has filed. A filing fee is necessary. To find your local court, go to the federal court locator page, select "Bankruptcy" under "Court Type," and enter your address in the bottom box.Counseling for credit
Nearly all individual debtors who wish to file a Chapter 7 case are required to attend a session with a certified credit counselor before filing. Attending the session is possible in person, online, or over the phone. To assist you in locating accredited credit counselors in your area, the U.S. Department of Justice offers an interactive search tool on its website. The justification for this requirement is that some individuals who might consider filing for bankruptcy are unaware of their other options. You might be able to avoid bankruptcy court with the help of a credit counselor's alternative suggestions. The majority of debtors must also complete a course in financial management before they can be discharged. The organization you use for credit counseling may also offer this course occasionally. Each class will last approximately two hours in person, online, or over the phone.Testing for Means
Also required when you file is a document known as the "means test," which must be passed by the debtor. In 2005, the Bankruptcy Code was amended to include this test. It determines if you have the means to pay off at least a portion of your debts and can determine whether you can afford to do so. Through a means test, your household's income is compared to the median income in your state. It then compares your costs to what is considered to be the local IRS average for what is considered to be comparable costs in your area. If you do not complete the means test, you can only file for bankruptcy under Chapter 7 under very specific exceptions. You could also submit a Chapter 13 repayment plan case as an alternative. Filling out and submitting Official Form 122A-2 to the bankruptcy court is required for the means test calculation.The Creditors' Meeting
When a Chapter 7 bankruptcy petition is filed, the court will issue a notice of the debtor's "meeting of creditors." After the bankruptcy code number that establishes it, this is frequently referred to as the "341 meeting." All of the creditors listed in your bankruptcy documents receive the notice. Any creditor is permitted to attend the meeting and grill the debtor about their bankruptcy and finances. The creditors that are most likely to show up are car lenders who want to know how you plan to handle your car payment if you have one. Note: Judges of bankruptcy courts are not permitted to attend the creditors' meeting. This rule is designed to protect their objectivity. At this meeting, the bankruptcy trustee will also question the debtor on various topics, such as whether all of the information in the bankruptcy documents is accurate and true. They'll assess whether the debtor knows all the consequences of declaring bankruptcy and receiving a discharge. If the trustee wants to look into certain aspects of the bankruptcy more thoroughly, they may postpone the creditors' meeting until later.The Discharge of the Debtor
If neither the trustee nor the creditors make a legitimate objection, the bankruptcy court will automatically grant a discharge. The deadline for submitting a complaint opposing a debtor's discharge is 60 days following the creditors' meeting or after the first meeting date if it is postponed and moved to another date or date. The discharge is typically entered a few days later if no complaint is lodged. If you owe a debt and it was incurred prior to the filing date of your bankruptcy petition, creditors cannot try to collect it from you. Certain taxes and obligations for paying child or spousal support are among the debts that cannot be discharged. You will continue to owe them even after the Chapter 7 proceedings are over. If a co-debtor signed the loan or debt with you but didn't file for bankruptcy, the creditor may still pursue collection efforts against them.Main Points
- Through the sale of assets, Chapter 7 bankruptcy discharges the majority of debts. The majority of Americans file for bankruptcy under this category.
- So that you don't lose everything you need to survive, you are allowed to keep some "exempt property."
- A means test, credit counseling, and a creditors' meeting are requirements for those filing for Chapter 7 bankruptcy.
- In the absence of a valid objection from either the trustee or the creditors, the bankruptcy court will automatically grant a discharge.
