Chapter 7 Bankruptcy Basics

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Chapter 7 Bankruptcy Basics

Chapter 7 is the liquidation chapter of the Bankruptcy Code. (It is available to businesses as well as individuals, but we will focus on the latter.) Under Chapter 7, a trustee is appointed to collect and sell all non-exempt property that is not secured (e.g., by a mortgage on your house), and to use any proceeds to pay creditors.

You can protect some property

The Bankruptcy Code allows an individual debtor to protect a certain relatively modest amount of property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor’s home state. Since the determination of what property is exempt and which you may keep is often a question of state law, you should consult an attorney to advise you.

Finding bankruptcy forms

(Official bankruptcy forms may be purchased at legal stationery stores or downloaded from the Internet at http://www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx. They are not available from the court. As a practical matter, however, filing for and following through with a bankruptcy case is extremely difficult to accomplish without a lawyer who regularly handles bankruptcy.)

What you must file

A Chapter 7 case begins with the debtor filing a petition with the US Bankruptcy Court serving the area where the individual lives. In addition to the petition, the debtor must file:

• Schedules of assets and liabilities
• A schedule of current income and expenditures
• A statement of financial affairs
• A copy of his or her tax return for the most recent tax
• A certificate of credit counseling
• Evidence of any payments received 60 days before filing
• A statement of monthly net income and any anticipated increase in income or expenses after filing
• The court charges about $300 in filing fees, which can be waived in some cases

In order to fill out the official bankruptcy forms that make up the petition, statement of financial affairs, and the various schedules, the debtor must provide the following information:

• A list of all creditors and the amount and nature of their claims
• The source and amount of the debtor’s income
• A list of all of the debtor’s property
• A detailed list of the debtor’s monthly living expenses

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee and creditors can evaluate the household’s financial position.

Filing a petition under Chapter 7 automatically "stays" (stops) most collection actions against the debtor. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

What if you earn too much money?

If the debtor’s "current monthly income" is more than the state median, the Bankruptcy Code requires application of a "means test" to determine whether the Chapter 7 filing should be dismissed. The "current monthly income" received by the debtor is the average monthly income received over the six months before the bankruptcy filing.

The individual Chapter 7 debtor hopes to and usually does receive a discharge, which means that he or she is relieved of the obligation to pay most unsecured debts. Debts not dischargeable include debts for alimony and child support, certain taxes, and debts for malicious injury by the debtor to another person.