An Overview of Chapter 7 Bankruptcy
Learn how Chapter 7 bankruptcy works.
Chapter 7 bankruptcy is sometimes called "liquidation" bankruptcy -- it cancels your debts, but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors.
Chapter 7 bankruptcy refers to the chapter of the federal statutes (the Bankruptcy Code) that contains the bankruptcy law.
Bankruptcy Costs in Time and Money
The whole Chapter 7 bankruptcy process takes about four to six months, costs $299 in filing and administrative fees, and commonly requires only one trip to the courthouse.
Who Can File
Chapter 7 can be a powerful remedy for debt problems,
but it isn't available to everyone. For example, you won't be able to use
Chapter 7 if you already received a bankruptcy discharge in the last six to
eight years (depending which type of bankruptcy you filed) or if, based on
your income, expenses, and debt burden, you could feasibly complete a
Chapter 13 repayment plan.
Bankruptcy Forms
To file for bankruptcy, you fill out a two-page petition and a number of other forms. Then you file the petition and forms with the bankruptcy court in your area. Basically, the forms ask you to describe:
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your property
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your current income and its sources
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your current monthly living expenses
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your debts
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property you claim the law allows you to keep through the bankruptcy process (called "exempt property") -- most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven't spent, and other necessities such as a car and the tools of your trade.
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property you owned and money you spent during the previous two years, and
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property you sold or gave away during the previous two years.
You must also file a certificate showing that you have completed credit counseling with an agency approved by the United States Trustee.
If you're facing an emergency, like a foreclosure or repossession in the next few days, you can file just the two-page petition, but you must file the rest of the forms within 15 days.
Bankruptcy's Magic Wand -- The Automatic Stay
Filing for bankruptcy puts into effect an "Order for
Relief" -- known informally as the "automatic stay." The automatic stay
immediately stops most creditors from trying to collect what you owe them.
So, at least temporarily, creditors cannot legally grab ("garnish") your
wages, empty your bank account, go after your car, house, or other property,
or cut off your utility service or welfare benefits.
Bankruptcy Court's Control Over Your Financial Affairs
By filing for bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. You can't sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court's consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.
The Bankruptcy Trustee
The court exercises its control through a court-appointed person called a "bankruptcy trustee." The trustee's primary duty is to see that your creditors are paid as much as possible on what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid.
The trustee (or the trustee's staff) will examine your papers to make sure they are complete and to look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 cases, the trustee finds nothing of value to sell.
The Creditors Meeting
A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a "creditors meeting" has been scheduled. The trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. The trustee will ask you whether the information in your papers is 100% true. Creditors rarely attend this meeting, but if they do, they may question you under oath about where collateral is located or about information you gave them to obtain the loan.
This meeting, which takes place somewhere in the courthouse, rarely lasts more than a minute or two. In the vast majority of Chapter 7 bankruptcies, this is the debtor's only visit to the courthouse.
What Happens to Your Property
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 equivalent value in cash. If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee may "abandon" the property -- which means that you get to keep it, even though it is nonexempt.
What Is Exempt Property?
Each state has laws that determine which items of property are exempt in bankruptcy, and in what amounts. These items cannot be seized by creditors or by the bankruptcy trustee.
Many states exempt health aids, "personal effects" (things such as electric shavers, hair dryers, and toothbrushes), ordinary household furniture and clothing without regard to their value.
Other kinds of property are exempt up to a limit. For example, in many states, furniture or a car is exempt to several thousands of dollars. This exemption limit means that any equity in the property above the limit isn't exempt. (Equity is the market value minus how much you still owe.)
Typically, the following items are exempt:
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part of the equity in motor vehicles (the amount varies from state to state)
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reasonably necessary clothing (no fur coats)
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reasonably necessary household goods and furnishings
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household appliances
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jewelry, to a few hundred dollars
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personal effects
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life insurance (cash or loan value or proceeds), (the amount varies from state to state)
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part of the equity in a residence (the amount varies from state to state)
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pensions
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public benefits
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tools of a trade or profession, to a certain value, and
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unpaid but earned wages.
(see also:
What Is Bankruptcy,
What happens in a chapter 7 case?
Reasons to file chapter 13 rather than chapter 7)