Many people contemplating filing bankruptcy want to know what is Chapter 7 bankruptcy. Chapter 7 is the single most common bankruptcy chapter filed in the United States. Chapter 7 refers to the chapter of the Bankruptcy Code which can be found in Title 11 of the United States Code. Chapter 7, commonly known as liquidation bankruptcy, involves the sale of a debtor’s non-exempt assets by a trustee. Any proceeds obtained by the bankruptcy trustee are then turned over to creditors.
Prior to the filing of a Chapter 7 bankruptcy, you (the debtor) should gather together all of his financial records in order to fill out the bankruptcy petition, schedules, statement of financial affairs and other documents. This includes bank statements, credit card statements, loan documents, pay stubs and other financial records. It is critical to have proof that the financial information the debtor puts on his bankruptcy documents matches their financial records. By having all of the records at hand, a debtor can quickly and efficiently comply with any requests by the trustee to verify your information.
COMPLETING BANKRUPTCY DOCUMENTS
Filing for Chapter 7 bankruptcy involves the completion of numerous documents. These documents are usually available as a packet from the bankruptcy court clerk’s office for a fee. Broadly, these documents include the voluntary petition for relief, the schedule of assets and liabilities, declarations regarding debtor education and the statement of financial affairs. These documents require the debtor to open up their financial life to the bankruptcy court, which includes a listing of all of their property, debts, creditors, income, expenses and property transfers, among other things. Upon the completion of all of the bankruptcy documents, a debtor must file the documents with the clerk of the bankruptcy court and pay a filing fee.
A debtor must also successfully pass the means test calculation, which is another document that must be completed prior to filing for bankruptcy. This test, which was added to the Bankruptcy Code in 2005, calculates whether you are able to afford, or have the “means” to pay your debts. The means test analyzes your income for the past six months and compares it with the median income for your place of residence. The means test also includes your secured debt in determining whether you can afford to pay for your debts. If you fail to pass the means test, you can only file Chapter 7 bankruptcy under very specialized exceptions. The means test has drawn criticism since its inception.
MEETING OF CREDITORS
After a Chapter 7 bankruptcy is filed, the court will issue a document giving notice of a debtor’s Meeting of Creditors. This notice is also sent to all of the creditors that are listed within the bankruptcy documents. During the Meeting of Creditors, the bankruptcy trustee will ask the debtor various questions about the bankruptcy, such as whether all of the information contained within the bankruptcy documents are true and correct. The trustee may ask other questions about a debtor’s financial affairs. If the trustee wishes to investigate the bankruptcy further, he may continue your Meeting of Creditors to a future date. On the other hand, the trustee may conclude the meeting on the first meeting. It is important to note that at the Meeting of Creditors, as the name suggests, any creditor may appear and ask a debtor questions about his bankruptcy and finances.
SEIZURE OF ASSETS
If you have any non-exempt property, the bankruptcy trustee has the ability to seize and sell the property. Exemptions refer to federal or state statutes which allow a debtor to keep certain types of property from seizure in bankruptcy or to satisfy a judgment. For example, exemptions exist to protect retirement accounts, such as a 401(k) plan. Exemptions must be set forth in Schedule C, a bankruptcy document filed by the debtor. Any assets that the trustee can recover are distributed to creditors.
If the trustee, nor any creditor objects to the debtor’s discharge, the bankruptcy court will automatically give the debtor a discharge at some point after the last day to object. The last day to file a complaint objecting to a debtor’s discharge is 60 days after the first session of the Meeting of Creditors. If there are no complaints are filed, the discharge is usually entered days later. The discharge prevents creditors from attempting to collect any debt against the debtor, personally, that arose prior to the filing of the bankruptcy. Thus, for all intents and purposes, the discharge effectively wipes out debts. However, it is important to note that not all debts are dischargeable, including, but not limited to certain taxes, student loans and child or spousal support obligations.