Chapter 7 Bankruptcy – What to Expect When You File Chapter 7

When the word “bankruptcy” comes to mind, people often think of “Chapter 7” personal bankruptcy because it is the most common. Under this type of bankruptcy, most of a person’s debts are discharged. However, the person who files for bankruptcy may have to give up certain assets.

How to File for Chapter 7 Bankruptcy Relief

There were certain amendments to the bankruptcy laws that went into effect in October 2005, consisting of a two-part test. This will determine if a person even qualifies for Chapter 7 bankruptcy.

1: Determine Repayment Capacity – The debtor’s income is examined under a certain formula, which exempts specific necessary expenses, such as rent and food, to see if the debtor can repay 25% of the “non-priority unsecured debt”.

2. Income Compared to State Median Income: The debtor’s wages are compared to statewide median income.

If the debtor earns more than the state median income and finds that the person can pay 25% of the “non-priority unsecured debt”, the debtor will NOT be eligible for Chapter 7 bankruptcy and will have to consider filing for Chapter 13 Bankruptcy.

The debtor must also have a meeting with a credit counselor sometime 6 months before filing for bankruptcy. He or she must also attend money management classes and must pay for them out of pocket.

The automatic stay

Once the debtor has filed for bankruptcy, the debtor’s estate is protected by the “automatic stay.” This means that debtors cannot attempt to collect debts without first getting permission from the bankruptcy court. Therefore, the debtor does not have to worry about their home being foreclosed on, their car repossessed, an apartment being evicted, wages or bank accounts being garnished, power being cut off, or any other measures that creditors may try to take to recover any money owed.

Although the suspension may prevent the debtor from being evicted from his apartment, the new obligations incurred by the debtor would be enforceable against his creditors. For example, if a debtor continues to rent an apartment, if they do not pay their accrued rent AFTER the date they filed for bankruptcy, then they may be evicted from the apartment.

The Chapter 7 Bankruptcy Process

A trustee is generally appointed by the court in a Chapter 7 bankruptcy case. The trustee’s primary duty is to make sure that your creditors receive as much of the amount owed to them as possible. The more of your assets the trustee can obtain for your creditors, the more the trustee is paid.

There will be a brief hearing called a “creditors’ meeting” that the debtor must attend, but creditors usually do not show up for the hearing. The trustee asks the debtor questions about his assets and obligations. This hearing usually lasts about five minutes.

After the trustee has exhausted the debtor’s funds obtained through the liquidation of his non-exempt property, most of the remaining unsecured debts are discharged.

In total, Chapter 7 bankruptcy takes four to six months to finalize.