In Chapter 7 Bankruptcy filings, most, if not all, of your debts are cleared or discharged; however, a trustee might sell, or "liquidate", some of your property to repay your creditors.

Chapter 7 Bankruptcy, often called "straight" and/or "liquidation" bankruptcy, is so named because the law is contained in Chapter 7 of the federal Bankruptcy Code.

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Filing Bankruptcy Triggers An "Automatic Stay" Stopping Creditor Calls

Filing for Chapter 7 Bankruptcy triggers an "automatic stay", which immediately stops creditors from trying to contact you to collect on what you owe them. Creditors cannot thereafter legally grab or "garnish" your wages, empty your bank account(s), repossess your car, attach a lien to your house or other property, or cut off your utility service once you have filed for Chapter 7 Bankruptcy.

What the Automatic Stay Prevents:

Utility Disconnections - If you are behind on utility bills and the companies are threatening to disconnect your water, electric, gas, and/or telephone service, the automatic stay will prevent the disconnection for at least 20-days. Although the amount of a utility bill rarely justifies a bankruptcy filing, it might make sense if you have other debt that you can discharge. Be aware that the utility company will likely be able to require that you pay a deposit to ensure future payment.

Foreclosure - If your home is being foreclosed on, the automatic stay will stop the proceedings; however, this will depend on the type of bankruptcy chapter that you filed. For instance, if you want to keep your home, a Chapter 13 Bankruptcy is usually better because you can catch-up back payments through a three-to-five-year repayment plan. By contrast, a Chapter 7 Bankruptcy does not have mechanisms that will allow you to retain your home if you are behind in your payments.

Eviction - If you are being evicted from your home, the automatic stay might provide some relief, but it is usually only temporary. If your landlord already has a judgment of possession against you when you file, the automatic stay will not affect these eviction proceedings. Thus, the landlord can continue just as if you had not filed for bankruptcy. Additionally, if the landlord alleges that you have been endangering the property or using controlled substances there, the automatic stay will not apply either. Thus, the automatic stay might buy you a few extra days or weeks, but the landlord will be permitted to request that the court lift the stay to allow the eviction to proceed and the court will grant the landlord's request because the property is owned by another party who only leased the property to you.

Collection of Over-Payment of Public Benefits - If you receive public benefits and were overpaid, the agency is normally entitled to collect the over-payment out of your future checks, or, if you no longer receive the benefits, the can collect from you directly. The automatic stay prevents this collection; however, if you have become ineligible for future benefits, the automatic stay does not prevent the agency from denying or terminating benefits for that reason.

Multiple Wage Garnishments - Filing for bankruptcy stops most wage garnishments immediately. Not only will you take home your full salary, you also will be able to discharge the qualifying debt, such as credit card debt balances and personal loans, as part of the bankruptcy. Please be aware that commonly garnished debts, such as for ongoing child support and alimony, will not get discharged. What will happen to overdue support payments and back taxes will depend on the bankruptcy chapter that you file because you will likely remain responsible after a Chapter 7 Bankruptcy or pay off the debt entirely in a Chapter 13 Bankruptcy.

What the Automatic Stay Cannot Prevent

Certain Tax Proceedings - The IRS can still audit you, issue a tax deficiency notice, demand a tax return, which often leads to an audit, issue a tax assessment, and/or demand payment of such an assessment. However, the automatic stay does temporarily stop the IRS from issuing a tax lien or seizing your property or income. Whether you’ll be responsible for the tax after your bankruptcy will depend on whether the tax gets discharged in Chapter 7 bankruptcy or whether you pay the debt in Chapter 13 Bankruptcy.

Support Actions - A lawsuit against you seeking to establish paternity or to establish, modify, and/or collect child support or alimony isn't stopped by your filing for bankruptcy.

Criminal Proceedings - A criminal proceeding will not be stopped by the automatic stay. For instance, if you were convicted of writing a bad check, sentenced to community service, and ordered to pay a fine, your obligation to do community service will not be stopped by your bankruptcy filing and because the fine was assessed as a punishment, you will likely be required to pay the fine as well.

Pension Loans - Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions and IRAs).

The Appointment of a Bankruptcy Trustee in a Chapter 7 Bankruptcy

By filing for Chapter 7 Bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. Thus, you cannot sell and/or give away any of the property you own when you file, or pay off your pre-filing debts, without the court's consent. That said, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.

The court exercises this control over your finances through a court-appointed person called a "bankruptcy trustee." The trustee's primary role is to ensure that your creditors are paid as much as possible of what you owe them. Additionally, the more assets the trustee recovers for creditors, the more the trustee is paid.

The trustee will examine your papers to make sure they are complete and to look for nonexempt property to sell for the benefit of your creditors. The trustee will also review all of your financial transactions during the previous year to see if any can be undone to free up additional assets to distribute to your creditors. In most Chapter 7 Bankruptcy cases, the trustee finds nothing of value to sell.

The Scheduling of The Creditors Meeting

A week or two after you file for Chapter 7 Bankruptcy, you (and all the creditors you list in your bankruptcy filings) will receive a notice that a "creditors meeting" has been scheduled. The bankruptcy trustee oversees the meeting and, after swearing you in, may ask you some questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 Bankruptcy cases, this is the debtor's only visit to the courthouse.

The Distribution of Your Property After The Creditors Meeting

If, after the creditors meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its value in cash. If the property is not worth very much or would be too time consuming for the trustee to sell, the trustee may "abandon" the property, which means you get to keep the property even though it is nonexempt.

Most property owned by Chapter 7 debtors is either exempt or essentially worthless for purposes of raising money for creditors. Consequently, few debtors are required to surrender any property unless the property serves as collateral for a secured debt.

The most common examples of collateral for a secured debt are houses and automobiles. If you are in behind on your payments, the creditor can request to have the automatic stay lifted to permit the creditor to repossess or foreclose on the property that served as collateral for the debt. However, if you are current on your payments, you can retain the property and continue making payments as before unless you have enough equity in the property to justify its sale by the trustee.

If a creditor has recorded a lien against your property because of a debt you have not paid (for example, because the creditor obtained a court judgment against you), that debt is also considered secured; but you may be able to remove the lien and thus the judgment through a Chapter 7 Bankruptcy.

The Chapter 7 Bankruptcy Discharge

At the end of the bankruptcy process, all your debts are cleared or "discharged" by the court, except:

  • Debts that automatically survive bankruptcy, such as child support, most tax debts, and student loans, unless the court rules otherwise, and
  • Debts that the court has declared non-dischargeable because the creditor objected; for example, debts incurred by your fraud or malicious acts.
Once the bankruptcy is complete, and all your non-dischargeable debt has been cleared or discharged, you can begin rebuilding your credit so you can reestablish your credit-rating.

The Chapter 7 Bankruptcy Process - An Overview

The Chapter 7 Bankruptcy process is relatively straightforward - it typically consists of six steps:

Step 1: Before filing, complete a mandatory credit-counseling course by phone or online.

Step 2: File the official bankruptcy forms (fillable forms are available online) listing all your property and creditors and providing information about your financial transactions during the previous two years.

Step 3: Mail the bankruptcy trustee, who handles the case for the court, a copy of your most recently filed income tax return, plus any other documents the trustee asks for.

Step 4: About 30 days after you file, attend a creditors’ meeting, usually the only personal appearance you’ll have to make. The creditors’ meeting occurs in a small hearing room and is conducted by the trustee. Creditors seldom appear. At this meeting, you are required to answer (under oath) any questions the trustee has about the information in your papers, or provide other information the trustee thinks is relevant. A typical meeting lasts five minutes or less. You are not required to have a lawyer represent you at this meeting and you will have to answer the trustee’s questions whether or not you have a lawyer with you.

Step 5: No later than 60-days after the creditors’ meeting, you must attend a mandatory budget counseling course, either by phone or online, and file a simple form telling the court that you have completed it along with a certificate of completion from the counseling agency.

Step 6: Thereafter, you wait. During this period, you cannot operate a business with inventory or sell or give away any property without the bankruptcy trustee’s permission. This continues until the court sends you a written discharge of your debts, which will occur within 60-to-75 days after the creditors’ meeting. During that period, creditors can, but seldom do, object to your discharging of a debt. The trustee arranges for you to turn over nonexempt property, if you have any, but most people who file for Chapter 7 Bankruptcy do not have any nonexempt assets and thus, are never required to surrender any of their property to the court.

Chapter 7 Bankruptcy Pre-Filing Considerations - An Overview

If you are thinking about filing for Chapter 7 Bankruptcy, here is an overview of what you will need to do:

1. Analyze Your Debt

Some debts, such as child support, most student loans, and recent tax debt, are not dischargeable in a Chapter 7 Bankruptcy. And if you pledged collateral for a debt, such as a house or car, the creditor can take the property if you are not current when you file and if you do not remain current after your filing.

2. Determine Your Property Exemptions

Every state has exemption laws, which dictate what types of property (or, in some cases, how much equity in a particular type of property), you are entitled to retain if you file Chapter 7 Bankruptcy. Most people can keep household furnishings, retirement accounts, a modest car, and/or some equity in your home. You will want to ensure that you can protect everything you want to keep before filing.

3. Verify Your Eligibility

Most people must take and pass the means test before qualifying for a discharge in Chapter 7 Bankruptcy (excluded individuals include those with primarily business debt and some military personnel). If your average gross income during the six months before you file is more than the median income for a family of your size in your state, you qualify. If not, you’ll subtract allowed expenses from your income to determine whether you’ll be allowed to use Chapter 7 Bankruptcy.

4. Redeem, Reaffirm or Surrender Your Secured Debts

If you pledged property as collateral for a loan, you will need to continue to pay the creditor if you want to retain the property. When you file for bankruptcy, you will be asked to decide whether you want to "redeem" the property, which is to pay the creditor the current replacement value of the property in a lump sum, "reaffirm" the debt, which is an agreement to continue paying per the contract with the creditor usually under the same terms, or "surrender" the property, which means you let the creditor reclaim the property. In some cases, depending on where you reside, there might be other options as well because some lenders will let debtors keep property as long as the debtor remains current on the loan.

5. Complete the Bankruptcy Filing Forms

You will complete a few dozen pages of forms in which you will advise the court of all your property, debts, income, expenses, and prior transactions. You will list the names of all your creditors, property, and income, list your property exemptions, and decide what you want to do about each of your secured debts. Finally, you will disclose property transactions that occurred up to ten (10) years before your case is filed.

6. Attend a Credit Counseling Course

Individuals who file for bankruptcy must complete a course before filing for bankruptcy, or, in unusual cases, shortly thereafter in accordance with the timeline set forth by the bankruptcy trustee.

7. File the Bankruptcy Filing Forms

Filing your petition, which includes the primary bankruptcy form, schedules, and other forms, officially starts your bankruptcy case. Most people file all the forms at once, but if you are pressed for time, you can opt for an "emergency filing" by completing a few of the required forms with the remaining forms being filed within 14-days of the emergency filing.

8. Pay the Filing Fee or Request a Fee Waiver

You will pay a filing fee when you file your forms. If you cannot pay it upfront, you could ask the court to split it into four payments. If you cannot pay it at all, you can apply for a fee waiver by filling out an application that you will file along with your bankruptcy petition. A judge will review it and, in most cases, issue the fee waiver if it appears you meet all necessary qualifications. The primary qualification is that your household income must be 150% of the federal poverty guideline levels or less and you cannot have sufficient income to pay in installment payments.

9. Submit Documents to the Bankruptcy Trustee

You will need to submit documents that prove the accuracy of the information provided in your bankruptcy forms. You can expect to forward bank statements, paycheck stubs, profit and loss statements, tax returns and other documents the trustee requires.

10. Attend a Creditors Meeting

In most cases, you will need to go to court only once for a short meeting with the bankruptcy trustee and perhaps a creditor or two, although it is unusual for creditors to appear at the creditors meeting. The trustee appointed to your case will check your identification, and ask standard questions required of all debtors, as well as specific questions about the information in your forms.

11. File Objections or Motions If Necessary 

If you dispute a creditor's claim against you or you want to discharge certain liens, you will need to address these matters before your bankruptcy case is closed; but if you forget to address a specific lien, most courts will allow you to reopen the case at a later date.

12. Reconcile Your Secured Debts

When you filed your bankruptcy forms, you will complete a form in which you will state how you intend to address your secured debts. Before your case is closed, you will need to act on these matters. Thus, if you indicated that you would return a car, you will want to be sure to make it available to the lender.

13. Complete a Debtor Education Course

After you file your paperwork, you will need to complete a second course called a debtor education course before you will receive a discharge, which is the order that discharges your debts. If you fail to submit your certificate on time, the court will close your matter without a discharge being filed; thus requiring you to file a motion to reopen the case. This will also require you to pay additional filing fees.

14. Receive Your Discharge

At the end of a successful bankruptcy filing, the court will issue an order discharging your qualifying debts. Once discharged, you no longer have a legal obligation to pay it, and the creditor has no right to collect it.

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