What Is a Chapter 7 Bankruptcy
Bankruptcy is the process by which a person can relieve himself of some or all of this debts under the guidelines laid down by the bankruptcy law.
Chapter 7 bankruptcy allows the discharging of debts after going through the process of liquidation of eligible assets.
The liquidation allows the borrower to pay back the creditor fully or partially, mostly partially. The assets that can be liquidated and those that are exempt is decided by the bankruptcy state law.
Any debt that remains after asset liquidation is discharged and the borrower can no longer be held legally liable or responsible to pay it.
The creditors or collectors will not have any rights to pursue recovery of the debts that have been discharged.
A chapter 7 bankruptcy will usually be discharged within 4 months of filing.
Information Needed to File a Chapter 7 Bankruptcy
The filing of a chapter 7 bankruptcy starts with the process of putting in required forms and information with your local bankruptcy court.
The information and the paperwork that you will usually have to provide during the time of filing is as follows:
- A schedule of assets and liability which lists all your creditors and the nature of your debt claims.
- A statement of current income and liabilities which must include your source of income, amount along with your monthly living expenses.
- ‘A statement of financial affairs’ form will need to be filled out. This form will ask questions pertaining to your income over the past three years, debts you owe, repossessions, foreclosures etc.
- A schedule of executory contracts and unexpired leases that you have not yet fulfilled.
- You need to provide the court with a copy of your most recent tax return and any other returns you file while your bankruptcy case is still open.
- If you have a lot of consumer debt as opposed to personal debt you will need to file a certificate of credit counselling completion from a government approved credit counselling agency along with a copy of any debt repayment plan that has been proposed by the agency.
- It is mandatory to receive credit counselling from an approved credit counselling agency not later than 180 days prior to the bankruptcy filing.
What Happens After You File for Chapter 7 Bankruptcy
The first thing to happen after a chapter 7 filing is that a trustee is assigned to the bankruptcy case. The exception is if you live in Alabama or North Carolina where a member of the bankruptcy court fulfils the function of a trustee.
The job of the trustee is to review the assets and determine which ones are exempt and which ones are non-exempt. Non-exempt assets are absorbed by the state and sold to pay back the creditors that you owe.
Assets that are exempt cannot be taken by the state and remain under ownership and control of the debtor.
If the trustee funds that all your assets are exempt then he will file a “no asset” report with the bankruptcy court.
It is a fact that most chapter 7 bankruptcy cases are no asset cases.
In case your bankruptcy filing involves non-exempt assets your creditors are allowed to file a claim for the distribution. They are given 90 days after the first date set for the meeting of the creditors to file their claims. The government creditors will have 180 days to file their claim.
Usually between 20 to 40 days after filing for bankruptcy the first meeting of the creditors is held. The borrower who is filing is required to attend along with the trustee assigned to the case.
The creditors are allowed to ask the trustee and the consumer questions about finances and assets. If the bankruptcy has been filed jointly with a spouse then both of them need to be present at the meeting.
Chapter 7 Bankruptcy Means Test
The U.S. government has passed a law that is meant to test a consumer’s claim to a bankruptcy.
The means test is designed to prevent abuse of the bankruptcy system and ensure that the consumer is truly unable to pay off his current debt.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires this step.
If the current monthly income is less than the median income for a household of your size in your state, you pass. You do not need to complete the rest of the means test. You can file for Chapter 7.
If a person makes more than the state’s median income the calculations get complicated. The court will try to arrive at projected monthly income over the next 5 years. It is best to consult a bankruptcy attorney or an accountant who specialises in bankruptcy at this point.
If you fail the means test, the bankruptcy filing will either be rejected the court or given the option to be converted to a chapter 13 bankruptcy filing.
How to Qualify for Chapter 7 Bankruptcy
Chapter 7 bankruptcy is typically harder to file than a chapter 13 bankruptcy. Also a chapter 7 bankruptcy stays for a longer period of time on the credit report of the borrower.
There are a few conditions and tests that an individual needs to pass before he can qualify for filing. The following are the requirements for filing under chapter 7 bankruptcy.
- Your income must qualify the means test.
- A person can only file for a chapter 7 bankruptcy if the monthly income is below the state’s median income for the family of his/her size. The consumer is required to go through the means test if more than half of his debt is from consumer purchases rather than business, tax or tort debts.
- You need to be an individual, married couple or a small business owner to qualify. You cannot file a chapter 7 bankruptcy on the behalf of a Corporation, LLC or a partnership.
You can file a chapter 7 bankruptcy if you are:
- An individual married and filing jointly with your spouse.
- A sole proprietor with personal liability on business debts.
- Half owner of a business partnership with someone other than your spouse and are filing bankruptcy on business debts that you have personal liability on.
How long does it take to discharge a chapter 7 bankruptcy
From the date the papers are first filed till the time that debts are discharged it takes usually takes about 4 months.
Discharge papers are automatically sent to all creditors letting them know that the debt has been discharged and that the creditors no longer have any legal right to try and collect the debt from the consumer any more.
A chapter 7 bankruptcy will remain on the credit report of the consumer for a period of 10 years and the person cannot file another chapter 7 bankruptcy for another eight years.
The same person will also not be able to file for a chapter 13 bankruptcy for another 4 to 6 years, the exact duration of which must come from your local court or a qualified attorney.
Costs of Filing for a Chapter 7 Bankruptcy
The filing for a chapter 7 bankruptcy costs a total of $309.
The breakup of this amount is as follows: The filing fee is $245, $39 for miscellaneous expenses and $25 for the trustee fee.
These are the official government fees and charges. If you choose to hire an attorney yourself it will be an entirely separate expense. The bankruptcy filing charges are supposed to be paid to the clerk of court when you file your bankruptcy paperwork.
It is possible to get the permission of the court to make the total payment in a maximum of four instalments.
In such a scenario the final payment is due no more than 120 days after you file. It is possible to get the bankruptcy fee waived altogether if you make less than 150% of the poverty level and you cannot afford to pay the fee at all even on instalments.
Not paying the bankruptcy fee when it is due will result in the bankruptcy filing being dismissed.