Chapter 7 bankruptcy is referred to in the Bankruptcy Code as liquidation bankruptcy. This is based on the authority of the bankruptcy court to sell your assets in order to pay your creditors. In reality, federal and state laws allow certain types of property to be exempt from a bankruptcy sale. In most cases, chapter 7 bankruptcy debtors have exempt property or property that is not the type that could raise revenue for paying creditors.
When you file your petition for bankruptcy in the federal bankruptcy court, an automatic stay is placed on all creditor attempts to collect a debt. During the bankruptcy process, there can be no attachment of your wages, no repossessions of your property and all collection actions will cease. Here is a simple overview of the Chapter 7 process and requirements.
Chapter 7 bankruptcy is designed to help those who are truly unable to pay their debts. A means test has been established to determine whether the debtor’s income is low enough to qualify for relief. If your income for the six months prior to the time you want to file your bankruptcy petition is below the median income for your state, you are eligible for Chapter 7 bankruptcy.
If your income is more than the median income in your state, there are other calculations that need to be made, such as the size of your family and your monthly expenses. Certain military members are exempt from the means test.
If you pass the means test, you can file for Chapter 7 bankruptcy. If you fail, you may still be able to file under Chapter 13. An experienced attorney can help you through this complex process to determine eligibility for Chapter 7 bankruptcy.
Pre-filing credit counseling
Within 15 days of filing your petition for bankruptcy, current law requires you to file a certificate confirming you received credit counseling within 180 days prior to filing the bankruptcy petition. The credit counseling must be provided by an agency approved by the bankruptcy trustee.
How to file
There are a number of forms that must be filled out including:
- An itemization of all your income, its source, frequency and amount
- Itemization of your current monthly living expenses
- A list of all your property with an itemization of property that is exempt from the bankruptcy court
- A list of the names of all your creditors, the amount you owe each one and the nature of the debt
At the end of the process, dischargeable debts are erased and you have a fresh start on life. The following types of debt are not discharged in bankruptcy:
- Back child and spousal support
- Most tax debts
- Student loans unless the bankruptcy court deems repaying them creates an undue hardship
- Debts specifically not discharged due to the court granting the objections by the creditor.