Chapter 7 for Individuals
Chapter 7: the straight or liquidation bankruptcy
To file for bankruptcy under this chapter, the debtor might be an individual, a partnership, or a corporation or other business entity. In order to file for a Chapter 7 the debtor does not need to have any income nor is there a limit to the amount of debt. However, if the debtor does have income, the income must fall below the state median or they must pass a means test.
See our section on The Means Test to learn more about this eligibilty requirement.
A personal Chapter 7 is designed for filers who have few assets they want to keep, while the valuable assets may be liquidated and used to pay off the debt, thereby discharging the debtor’s obligation to pay. Some of the assets that may be protected from liquidation, referred to as Exemptions, may include a car, clothing, or retirement accounts among others and vary from state to state. Due to exemptions, most people don’t have to give up any of their possessions. Once the trustee grants a discharge, the debtor no longer has any obligation to pay the remaining debts, unlike a Chapter 13 where the debtor enters into a repayment plan to keep most or all of their property. However, some debts are not dischargeable like most taxes, child support, alimony, most student loans, court fines or restitution, and personal injury debts incurred while under the influence of drugs or alcohol.
To see a list of what assets you are allowed to keep in Chapter 7, see our section on Exemptions.
Chapter 7 process:
The Chapter 7 personal bankruptcy commences by filing a petition with the local bankruptcy court. Upon filing an “automatic stay” goes into effect, which means the creditors are prohibited from making any attempt to collect their debt including contact by phone, attempting foreclosure, repossession of secured property, garnishment of wages, eviction, or initiating or continuing lawsuits.
Along with the petition, the debtor must file various documents to the Trustee in order to provide the necessary information to adequately review the debtor’s financial situation. These schedules and statements include a list of outstanding debts, current income and expenses, a list of executory contracts and unexpired leases, any current or potential lawsuits, any recent asset transfers, anticipated increases in income or expenses after filing, and documentation of any federal or state qualified education or tuition accounts. The debtor must also provide evidence of payment from employers, like pay stubs, or social security benefits received within 60 days of filing. The debtor must also provide a copy of the current year’s tax return or transcripts along with tax returns filed during the case even if they are for prior years.
Prior to filing, the debtor must complete a credit counseling course within 180 days of filing the petition and provide a completion certificate to the court along with a copy of any debt repayment plan developed through credit counseling. Failure to submit any of these requirements may result in the case being dismissed.
The most important document that Chapter 7 filers will include that is one of the fundamental differences from Chapter 13 filers which is a list of exempted assets. Personal debtors who file under Chapter 7 are allowed to exempt some assets from collection and liquidation by the Trustee who would then distribute the proceeds to the your creditors to pay off the debts.
Once the Court receives the bankruptcy petition, a Bankruptcy Trustee is appointed to administer the case and a date is set for the creditor’s meeting between 21 and 40 days after the petition is filed. This meeting is also called a 341 Hearing where the debtor must appear before the Trustee and creditors who will ask questions of the debtor. The Trustee’s role is to evaluate the case by determining the debtor’s solvency and to collect and then disburse non-exempted liquidated assets to the creditors. Creditors may then file their claims with the court within 90 days after the first date set for the meeting of creditors. Lastly, the debtor must submit a certificate of completion from a debtor education course within 45 days from the first date set for the 341 Hearing.
In approximately 60 to 90 days after the first date set for the 341 Hearing, the Bankruptcy Court discharges the remaining debt and closes the bankruptcy proceeding. This happens in 99% of Chapter 7 cases as reported by the U.S. Bankruptcy Court.
For additional information on filing for bankruptcy, see our section on Bankruptcy Frequently Asked Questions.
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