What are the basics of a Chapter 7 bankruptcy?

By: LawInfo

Published: 12/2008

When people talk about filing bankruptcy, they usually are referring to Chapter 7 bankruptcy, which allows you to discharge, or wipe out, most debts that you owe. In many cases, filing Chapter 7 bankruptcy is the quickest and easiest way for a person who owes a lot of debt to get a “fresh start” in life. So long as you are eligible for Chapter 7 bankruptcy relief, and depending on your individual situation, you could find yourself free of all dischargeable debts within just a few short months.

In order to file Chapter 7 bankruptcy, you must file a petition with your local bankruptcy court, along with several required forms that list your income, assets, debts, and living expenses. Therefore, it is necessary to provide your bankruptcy attorney with a clear, detailed picture of all of your financial affairs. If you owe mostly consumer debt, such as credit cards, the bankruptcy court will require you to undergo credit counseling with an approved agency before filing bankruptcy. You can file Chapter 7 bankruptcy individually, or jointly with your spouse.

Some of your property will be “exempt” from the bankruptcy proceedings, which means that you will get to keep it, regardless of debts that you owe to your creditors. Whether property is exempt depends on both federal and state bankruptcy law. Filing bankruptcy will also result in an “automatic stay” against your creditors. With some exceptions, the automatic stay stops all creditors from attempting to collect debts from you while the bankruptcy proceedings are going on. All of your creditors will be notified of your bankruptcy filing by the court, so your creditors will be aware that they cannot collect debts from you during this time period.

About a month after you file Chapter 7 bankruptcy, your bankruptcy trustee, or the person assigned by the court to manage your case, will hold a meeting of creditors that you must attend. At that meeting, you may have to answer questions about your financial situation from both the trustee and/or your creditors. The main role of your trustee is to ensure that you comply with all rules and requests for information, and to liquidate any assets that you have that are not exempt. Any assets that are available to liquidate will be distributed to your creditors in accordance with the bankruptcy laws for the priority of claims. In many cases, however, there are no non-exempt assets, so there will be no distribution or payments made to the creditors at all.

Finally, unless a creditor objects, or there is something unusual in your financial situation, the bankruptcy court generally will grant you a discharge of all dischargeable debts that you owe. This means that the creditors can no longer take any action against you to collect the debts that you owe them. If all goes smoothly, discharge can occur in as little as four months. There are a few exceptions where discharge may not occur, but as a rule, the end result of a Chapter 7 bankruptcy is discharge the vast majority of the time.