Chapter 7 Bankruptcy Law
Chapter 7 bankruptcy, sometimes called liquidation, offers individuals with overwhelming debt a chance to eliminate many financial obligations. It is generally suited to those whose income falls below certain thresholds or who cannot repay debts over time. This process involves a court-supervised sale of assets that are not protected, followed by the discharge of most remaining debts.
Eligibility and the Means Test
Individuals must first pass a means test to qualify for Chapter 7. This test compares a person's income to the median income in their state. If the income is below the median, eligibility is usually granted. Those with higher incomes may still qualify if their disposable income, calculated after subtracting essential expenses, remains insufficient to repay a substantial portion of their debts. Before filing, a credit counseling course is generally required.
Exempt and Non-Exempt Property
Exempt property is generally protected from sale in a Chapter 7 bankruptcy. In many states, exemptions may cover at least some of the equity in your home and your car, as well as basic household furniture and appliances. Personal items necessary for daily living or work are also often protected. Non-exempt property may be sold by the bankruptcy trustee to pay creditors. The exact exemptions available vary by state, and some states allow individuals to choose between state and federal exemption schemes.
Automatic Stay
Upon filing for Chapter 7, an automatic stay halts most collection actions. Wage garnishments, foreclosure actions, and creditor phone calls must cease immediately. Creditors wishing to continue any collection efforts must seek court permission. This stay provides short-term relief and an opportunity to address debts without constant creditor pressure.
Non-Dischargeable Debts
Certain debts remain after Chapter 7 concludes, meaning they cannot be discharged. Domestic support obligations, such as child support or alimony, usually survive the bankruptcy process. Debts stemming from criminal fines or restitution also remain. Most student loans remain non-dischargeable unless a separate legal process shows undue hardship.
Filing the Petition
A Chapter 7 case begins with the filing of a petition and accompanying schedules. These documents list all assets, debts, income, and expenses. Any property claimed as exempt should be clearly identified. Failing to disclose assets or debts accurately can result in serious consequences, including denial of discharge.
Role of the Bankruptcy Trustee
After filing, a trustee is appointed to oversee the bankruptcy estate. The trustee reviews the filer's property exemptions and may investigate any recent transfers of assets. If property is non-exempt, the trustee arranges for its sale and distributes proceeds to creditors. Many cases result in "no asset" findings, where the filer has no non-exempt property and creditors receive little or no payment.
Meeting of Creditors
In a meeting of creditors, often called a 341 hearing, the trustee questions the filer under oath to confirm the information in the petition. Creditors may attend and ask questions, though most choose not to appear. Honesty and clarity when discussing finances are central to avoiding complications or objections to discharge.
Debtor Education and Discharge
After filing, filers generally complete a debtor education course addressing financial management. Failure to finish this course can delay or prevent a discharge. Once all requirements are met and the trustee identifies no issues, the court grants a discharge. This discharge eliminates the legal obligation to pay most outstanding debts. A record of the Chapter 7 filing remains on the filer's credit report for up to ten years, which can influence future borrowing opportunities.
