Chapter 7, otherwise known as "liquidation," is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A trustee (appointed by the court) gathers and sells your non-exempt property and uses the proceeds from the sale to pay your creditors.
"Exempt property" is property that a debtor is allowed to keep. What property is exempt is determined by state law. In certain states you are required to use the exemptions under your state's laws. In fifteen states and the District of Columbia, you can chose the exemptions that work the best for you - either the federal exemptions or your state's exemption. It is always best to check with an attorney in your state to see what exemptions apply to your individual case.
The new law also increased the amount of time you have to live in the state before you are eligible to use that state's exemptions. This was to prevent a debtor from moving to a state with more generous exemptions just prior to filing for bankruptcy.
Most chapter 7 cases are "no-asset" cases, which simply means that you do not have any non-exempt property for the trustee to sell. At the time that you file your petition for bankruptcy, you declare whether your case is "asset" or "no-asset" and the burden is on the trustee to change the designation.
Beginning October 17, 2005, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you must undergo a "means test" to qualify for Chapter 7 bankruptcy. The "means test" is how the Internal Revenue Service will determine who can or cannot file for Chapter 7. Your income and expenses are examined in detail to see how they compare to the standard for your area as set by the IRS. If you earn less than the median income for a family of your size in your state, you can automatically file for Chapter 7 bankruptcy.. But if your income from the last six months is greater than the median income and you can pay at least $6,000 over five years or $100 a month toward your debt, you are not allowed to file for Chapter 7 but must file for Chapter 13 instead. Chapter 13 will require you to repay a portion of your debts over three to five years.
A part of the means test requires that you file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.
Under the new law, when you file for bankruptcy you must take a credit counseling course before filing, and financial management course after filing. Both of these courses are relatively simple to take, and may be taken over the internet usually in under an hour. The law office of Thomas E. Trunnell will assist you in signing up for these classes and completing them.
A bankruptcy starts with the filing of the official petition, schedules and Statement of Financial Affairs with the bankruptcy court. In order to complete the Bankruptcy Forms, you must provide a list of all of your creditors and the amount and type of their claim; the source, amount, and the frequency of your income; a list of all of your property; and a detailed list of your monthly living expenses.
As soon as you file for bankruptcy, your creditors are prevented from trying to collect on your debts through what's called an "automatic stay." The stay is designed to preserve your property and to give you a break from litigation.
A creditor must show the bankruptcy judge, after a hearing, that there is "cause" for the creditor to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy period).
If there is property that isn't exempt, the trustee takes control of it. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims. Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.
Usually between 20 and 40 days after you file your petition, the trustee will hold the "first meeting of creditors" (also called a "341 hearing"). You must be present for that meeting. The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do.
Generally, the only responsibilities you have with respect to the bankruptcy after the 341 meeting is to cooperate with the trustee in providing any requested information.
Creditors have 60 days after the 341 meeting to convince the bankruptcy court you shouldn't be allowed to jettison your debts.
Creditors may also approach you about what's called "reaffirmation" of debts. Reaffirmation is an agreement between you and a creditor that you will remain liable on a debt and will pay the remaining portion of the amount owed in order to keep certain property, such as an automobile, even though the debt could be discharged.
Under the old bankruptcy law, you could make your car payments when they came due. When the loan was fully paid, title to the car would be transferred to you. If you defaulted on the loan after discharge, the creditor could repossess the car, but the repossession deficiency amount that you owed would still be wiped out and you would owe nothing. Under the new law, you have to reaffirm your car loan within 45 days after the "341 meeting." You no longer have the option of continuing your car payments without reaffirming the loan. Once the loan is reaffirmed, if you default on your payments and the car is repossessed, you are liable for the repossession deficiency.
You also have the option to redeem the car within 45 days of the "341 meeting." This means that you have to pay the entire balance due within that time. Because most debtors do not have that kind of money, this option is rarely used.
If you decide to reaffirm a debt, you are required under the Bankruptcy Code to file an agreement with the court. The agreement must disclose that you were advised of the amount of the debt you are reaffirming and how it was calculated and that you are aware that the debt will not be discharged. You must indicate your income and expenses so that the court can see that there is sufficient money to pay the reaffirmed debt. Unless you are represented by an attorney, the court must approve the agreement. A hearing will be held if the court disapproves. If an attorney represents you, he or she must certify in writing that they advised you of the legal consequences of the agreement, that you were fully informed and entered into the agreement voluntarily, and that the reaffirmation will not create an undue hardship on you and your family.
Unsecured creditors may offer deals for new credit based on reaffirming the existing balance on your credit card.
The trustee may review your income and expenses to see if you have enough money left after your current living expenses to pay something to creditors.
If creditors haven't filed a suit to stop you from getting out from under your debts within 60 days of the 341 meeting, the court will enter an order granting the "discharge" of all dischargeable debts that existed on the date the case was filed.