How Does Chapter 7 Bankruptcy Work?

Financial times are tough and your bills are adding up. If things are getting out of control, you might want to consider filing for Bankruptcy under Chapter 7.

What are the benefits?

When a Chapter 7 bankruptcy is filed, something called an “automatic stay” is immediately initiated. With a few exceptions, the automatic stay stops creditors from being able to collect what you owe them. While the bankruptcy plan is under review, your creditors cannot legally garnish your wages, repossess your car, or foreclose on your house.

Once the Chapter 7 bankruptcy plan is confirmed, the bankruptcy trustee can eliminate or discharge a lot of your unsecured debt. Unsecured debt, such as credit card debt, exists when your creditor cannot sell or take possession of your assets if you fail to repay the debt.

What to expect

When you file for Bankruptcy, you will be expected to list all your property, current income, monthly living expenses, debts, exempt and non-exempt property, all property or money that you owned in the last two years, and all property or money you sold or gave away in the past two years. You will also be expected to provide a list of all your creditors and their address. A couple of weeks after you file, all the creditors you listed will be given notice of a creditors meeting appointment. The bankruptcy trustee runs the meeting and you are expected to attend and answer the trustee’s questions about your financial situation. This is typically the only legal proceeding that you are required to attend.

When a Chapter 7 bankruptcy is filed, you are basically placing your assets and debts into the courts hands. This means you cannot sell or give away any of the assets listed in the plan. Likewise, you can’t pay off any listed debts. The trustee will then look at your paperwork and examine your nonexempt property to see if it can be sold. Most of the time, people filing for Chapter 7 have property that is either exempt or is “abandoned” by the trustee – meaning that the value of the property does not justify the effort for the trustee to sell it. The trustee might also look at your financial transactions over the last 12 months to see if they can be undone to free up more of your assets.

In the end, the trustee will try take what available capital you have (if any) and, as much as possible, repay your creditors. Whatever unsecured debt is not repaid, will then be discharged. Eliminating your legal obligation to repay discharged debt gives you and your family a clean slate and fresh start and will ultimately help you get back on your feet and provide for your family once again.

Note about Secured Debts

Generally speaking, a secured debt exists when a creditor has a right to sell an asset if you do not repay the debt. The most common example would be a loan for a house or a car. Secured debts are rarely, if ever, discharged. Although a Chapter 7 bankruptcy can prevent the property from being seized there are some limitations. If you cannot stay current on your payments going forward, the creditor may take action to repossess the property once again.

Who can file

You may not be able to file for a Chapter 7 bankruptcy if you previously filed in the last six to eight years (depending on the type of bankruptcy previously filed). Also, your existing debt obligations, income, and expenses are taken into account. Higher-income consumers must fill out "means test" forms requiring detailed information about their income and expenses. If the forms show, based on standards in the law, that they have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that they cannot file a Chapter 7 case, unless there are special extenuating circumstances. In such case, you may have to file a Chapter 13 case.