Chapter 7 Bankruptcy Law
What is Bankruptcy?
Bankruptcy is a federal court process. It is designed to help consumers and businesses eliminate debt or repay debts under the protection of the bankruptcy court. There are two categories of bankruptcy, "liquidation" or "reorganization":
- Liquidation bankruptcy (or Chapter 7) - a consumer or business asks the court to discharge the debts owed (some debts cannot be discharged). In exchange, the business's assets or the consumer's property is sold (liquidated) and the proceeds are used to pay off the creditors.
- Reorganization bankruptcy - involves filing a plan with the bankruptcy court suggesting how you will repay your debt. Some debts must be repaid in full while others require only a percentage or nothing at all.
What is Chapter 7 Bankruptcy?
Chapter 7, also called "straight" bankruptcy, is a form of liquidation bankruptcy. If you have a great amount of debt compared to your income, it may be appropriate to file for Chapter 7 bankruptcy. Chapter 7 is most frequently used in the case of individuals. Under Chapter 7, most, but not all, of your debts are discharged. As an individual, you will lose some of your property (nonexempt assets). The proceeds from the sale of these assets go to your creditors. Some property can be claimed as exempt when you file for Chapter 7. Federal law provides for which types of property can be exempt, and each state has its own list.
Are All of my Debts Discharged under Chapter 7?
No, as stated above, not all of your debts are discharged under Chapter 7. In addition, certain types of debts must be paid off before others. Priority debts (those that must be repaid first) include taxes and the administrative expenses of bankruptcy. Often, the only debts that can be paid off are these priority debts. Other types of debt that remain after your bankruptcy is over include:
- Alimony and child support payments
- Most taxes
- Some educational loans
- Fines and penalties that government entities have charged you with
- Any debts incurred after filing for bankruptcy
What is the Process for Filing for Chapter 7?
The process takes about four to six months, with filing and administrative fees, and one trip to the courthouse. Other things that you must do include:
- Filling out a two-page petition and other forms (describing your property, income, monthly living expenses, debts, exempt property, property owned and money spent in the previous 2 years, and property given away in the previous 2 years)
- Filing the petition/forms with the bankruptcy court in your area
- Filing results in an automatic stay, meaning your creditors cannot collect what you owe them
- Nothing can be sold or paid without the court's consent
- The court-appointed bankruptcy trustee goes through your papers and asks you questions at a short hearing (a creditors' meeting)
- After the meeting, the trustee takes your nonexempt property to be sold. This may include:
- Surrendering your property
- Paying the fair market value
- Swapping exempt property of equal value for nonexempt property
Finally, you can have your Chapter 7 claim dismissed as long as the dismissal will not harm your creditors.
Should I Consult an Experienced Bankruptcy Lawyer?
It may be helpful to see a lawyer who has experience with bankruptcy issues and cases. As stated earlier, the process for filing for Chapter 7 is complicated and a lawyer may best be able to help guide you through it.
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Last Modified: 12-03-2010 02:48 PM PST