A chapter 7 bankruptcy is also known as a “debt liquidation.” A chapter 7 bankruptcy wipes out most or all of your debts. It is often the best option for people with limited incomes and unmanageable debt.
Before you can file a chapter 7 bankruptcy, you must attend credit counseling provided by an approved agency. You may want to consult with your bankruptcy attorney before you choose a credit counseling agency. Some agencies will try to discourage bankruptcy, even if that is your best option, because they want to sell you their debt negotiation services. Your attorney can help you find an agency that won’t pressure you to pay for debt management services that might prove to be a waste of your time and money.
Based on the information you provide, your bankruptcy attorney will prepare a petition to file with the Bankruptcy Court. The petition must list all of your debts and must designate whether those debts are disputed. You are not allowed to list some creditors and skip others. The petition also lists all the property you own. You are allowed to keep “exempt” property that cannot be sold to satisfy your debts. You must claim those exemptions on your bankruptcy petition.
If you have secured debt, such as a mortgage on your home or a lien on your car, your bankruptcy petition must designate how you plan to deal with that debt. You can surrender the property to your creditor or you can keep the property if you pay its current value to your creditor. In some cases, you can negotiate with the creditor to “reaffirm” the debt. When you reaffirm a debt, you are allowed to keep your property provided that you continue making payments (or make payments on new terms that you negotiate).
Automatic Stay and Filing of Claims
As soon as you file your petition, the court enters an “automatic stay” that prevents your creditors from taking further effort to collect your debt. The court then mails a notice to each creditor you listed on your petition. The notice informs the creditor that the court has entered a stay and warns of penalties if the creditor tries to collect the debt without obtaining relief from the stay. Creditors with secured debt that you did not reaffirm can ask the court to lift the stay so they can proceed with foreclosure or repossession.
The notice also advises creditors of their right to file a claim for payment and of the date of the first meeting of creditors. If a creditor files a claim that you think is inaccurate (claiming more than is owed or claiming a security interest that you believe is not valid), you have the right to file an objection to the claim within the time set by the court.
Going to Court
The court will set a date for a First Meeting of Creditors (341 Meeting) that you and your attorney will need to attend. The meeting is usually conducted by the bankruptcy trustee assigned to your case. The trustee will ask you to swear that the information in your petition is true and complete. Your creditors are entitled to attend the meeting and to question you about your debt. In practice, creditors rarely attend unless they suspect fraud or believe that your petition is inaccurate or incomplete. The meeting usually lasts only a few minutes.
At the hearing, the Chapter 7 Trustee will place you under oath and verify your identity (you must present a valid driver’s license or other acceptable photographic proof of identity and your Social Security Card). The trustee will generally ask you questions about the preparation of your bankruptcy schedules and the information contained in the schedules. The questions vary by trustee and region and usually include, but are not limited to:
- Did you list all of your assets, creditors and income?
- Have you paid any relatives or close friends in the past year?
- Have you sold or transferred any assets?
- Do you owe any domestic support obligations?
- Did you review your schedules with your attorney and are they accurate to the best of your knowledge?
- Do you have any changes or additions to the schedules?
- Have you ever owned or operated a business?
- How did you determine the value of the assets you listed in your schedules?
- Have you ever filed bankruptcy before?
The job of the Chapter 7 Trustee is to locate non-exempt assets that he can liquidate to pay unsecured creditors. He will review each asset listed to determine if there is equity after applying applicable exemptions and deducting valid liens. It is also his job to review the case for fraud with regard to your finances and your property.
If you own property that is not exempt, the bankruptcy trustee will decide whether it is worth selling the property to satisfy your debts. The trustee will notify you if you need to surrender the property so that it can be sold.
At the end of the case, the Bankruptcy Court enters a discharge of all listed debts that you did not reaffirm. The discharge prevents your creditors from ever seeking collection of those debts and gives you a fresh start on a new, debt-free life. In most no non-exempt asset cases, the debtor will receive his or her discharge within a few months and the case will be closed. Asset cases will remain open until the trustee sells the asset, distributes the funds to creditors, and files his final report and accounting.
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Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.