A Chapter 7 Bankruptcy is a liquidation bankruptcy and what most people think of when they think about bankruptcy. It is used when a person can not reasonably afford to pay money to their creditors. The filing of a bankruptcy case creates an estate, which is comprised of all legal or equitable interests of the debtor in property as of the commencement of the case and any interest of the debtor acquired within 180 days due to inheritance, spousal settlement, or as beneficiary of a life insurance policy. The law provides certain exemptions that allow a debtor to keep certain property of the estate and these exemptions vary depending on where the bankruptcy is filed. Property that is not claimed as exempt will be liquidated and the proceeds used to pay the debtor's creditors. It is important to carefully plan prior to filing a Chapter 7 Bankruptcy to ensure that no property is liquidated that the debtor is not prepared to lose. After the estate is liquidated or the trustee determines that no assets are available to pay creditors, the Bankruptcy Judge will issue a discharge, which is the order declaring that the debtor is no longer responsible for paying debts that are not deemed nondischargeable. The following article is intended to provide a general understanding of the steps in a Chapter 7 Bankruptcy case.
Your attorney files a Chapter 7 Bankruptcy petition in the United States Bankruptcy Court. The filing of your petition initiates your case and creates an Automatic Stay that prohibits your creditors from taking any actions against you to collect on your debts. This is what stops the sale of your home, or any garnishments, or any impending repossessions. The filing of your petition also creates a bankruptcy estate that includes property that you have any legal or equitable interest in. The trustee will liquidate non-exempt property of this estate and use the proceeds to pay your creditors. After your petition is filed, you continue make scheduled payments to your secured creditors and remain current with them if you intend to keep the property securing the debt.
(Usually done simultaneously with Step 1)
Your attorney files your schedules and statement of financial affairs in the Bankruptcy Court. The schedules are detailed listings of your assets and liabilities and income and expenses. You are required by the United States Bankruptcy Code to list all assets that you have and all debts that you owe. The law proves exemptions that exclude certain assets from your Bankruptcy estate. Exempt assets will not be liquidated and you make keep them. The United States Bankruptcy Code excludes certain debts from discharge, including but not limited to most student loans, certain tax debt, debt obtained fraudulently, alimony/child support, and government fines. The statement of financial affairs contains your answers to several questions which the Bankruptcy Court requires that explain your financial situation. The schedules and statement of financial affairs are prepared by your attorney with the information that you provide at your initial interview.
(About one month after the date that your petition is filed)
You attend the meeting of creditors at the Office of the United States Trustee. At this meeting, the trustee will ask you several general questions primarily to determine if you have any non exempt assets that can be liquidated to pay your debts. Your attorney will accompany you to this meeting and will assist with any issues that may arise.
(About 4 months after the date that your petition is filed)
You will receive a discharge that cancels your obligation to pay certain debts.