The purpose of a Chapter 7 bankruptcy is to give you a fresh start by wiping out most or all of your unsecured debt, such as credit card payments and medical bills. Contrary to common misunderstanding, you may be allowed to keep all of your possessions.
Chapter 7 bankruptcy is liquidation. That means that a bankruptcy trustee will sell (liquidate) certain property that you own at the time you file. The trustee uses the proceeds of the sale to pay creditors. In most cases, you will not have any assets that the trustee can sell because of exemption laws that may allow you to keep necessities.
Bankruptcy Exemptions Laws
An important part of the bankruptcy process, exemption laws are a set of federal and state laws that determine what property you can keep and what the trustee can sell. The property that the trustee may sell is known as "non-exempt" property. Property that is given an exemption can't be sold to satisfy your debts. If all of your property is "exempt", the trustee will not sell any of your property.
What to Expect
About 90 days after you file Chapter 7, most of your debts will be discharged, if yours is the typical case. This means you are no longer liable to pay the debt. Some debts are not discharged, however, and you still must pay them. Examples include past-due child support payments, some taxes, and student loans. Debts for which you have pledged Collateral (such as cars, homes and household goods) also do not go away entirely in a bankruptcy.
Filing for bankruptcy allows you to discharge only the debts you list at the time of the bankruptcy case (your "pre-petition" debts). You must pay debts you incur after filing the bankruptcy case as usual. You may keep the money that you earn after filing a Chapter 7 bankruptcy case, as well as most other property that you obtain after the filing.
Who Can Declare Chapter 7 Bankruptcy?
Chapter 7 can be a fast, simple and effective way to deal with unmanageable debt-but it isn't a solution for everyone. We can help you decide if it is right for you, although in general, you're a good candidate if:
- You have no other recent bankruptcy.
- If your debts have been discharged in a Chapter 7 bankruptcy within the past eight years or in a Chapter 13 bankruptcy within the past six years, you cannot file Chapter 7.
- You meet low-income standards.
- In this case, "low income" means that your current monthly income is less than or equal to the median income for a family of your size in your state. If your income is greater than the median, you must meet a bankruptcy means test to qualify. The means test helps to determine if your disposable income is sufficient to repay at least some of your unsecured debt.
- You have received credit-counseling services.
- You must have participated in a credit-counseling program with an approved agency within 180 days prior to filing. If you've had a previous bankruptcy case dismissed within the past 180 days, you cannot file Chapter 7 bankruptcy. In addition, if the court rules that you've concealed property or assets, lied about your income on a credit application, or engaged in other dishonest activities, your case may be dismissed. Truthfulness is absolutely essential when filing bankruptcy.
What Does Filing Involve?
First, you must prepare a voluntary bankruptcy petition and in-depth schedules of your assets, liabilities, income, and expenses. You must also furnish proof of income, copies of your most recent tax returns, and confirmation that you've participated in credit counseling prior to filing, as required by law.
- When your petition has been filed electronically with the help of your lawyer, an automatic stay will go into effect. This temporary order protects you from further collection attempts and the threat of repossession or foreclosure on your home or other property.
- Between 20 and 40 days, after you file your petition, the case trustee will call a meeting of creditors, which you'll attend with your bankruptcy lawyer. You'll answer questions to demonstrate that you understand the potential consequences of filing Chapter 7 bankruptcy. You may also be asked for additional information about your financial situation.
- If there are no objections to your petition or schedules, you should receive your discharge from debt within 90 days following the meeting of creditors. A Chapter 7 discharge is a release from any personal liability for most of your debts, and it prevents the creditors associated with these debts from taking any further collection action against you.
Other Commonly Asked Questions
How Much Property Do I Keep?
Only exempt property, which usually means necessities, may be kept. A Trustee appointed by the court will sell the rest of your property to pay people you owe (your Creditors).
How Much Time Does it Take?
Two to three months.
What Happens to My Credit Report?
Stays on your credit report for 10 years.
What Happens to my Retirement Account or Pension if I File Bankruptcy?
You will be allowed to keep it.
If you have other questions, you may find answers on our Frequently Asked Questions page.