A Chapter 7 Bankruptcy is the most common type of bankruptcy filed by a bankruptcy attorney and is sometimes known as a "straight " or “liquidation” bankruptcy. This type of bankruptcy is generally used to eliminate or discharge all of a person's debts with a few exceptions.
When filing a Chapter 7, the debtor is allowed to keep certain exempt property depending upon the exemption structure utilized when filing the case. In Pennsylvania for example, we are allowed to choose between either the Federal or State Law exemptions, but not mix the two. Because there is usually little to no equity and/or non-exempt property in most Chapter 7 cases, there will most likely never be an actual liquidation of a debtor's assets leading to the debtor being allowed to keep all of his or her property and still get rid of most, if not all, of his or her debts.
However, it is important to have a good bankruptcy attorney examine your assets and the available exemptions before filing any type of bankruptcy so that there are no “surprises.”After the filing of the case or declaring bankruptcy, the debtor normally receives a discharge in just a few months.
The Benefits and Drawbacks to Filing a Chapter 7 Bankruptcy
- Eliminates Almost All Debts
- Quick Process to Eliminate Debts in 3-5 months
- Instantly Stops Almost Any Kind of Collection Activity
- Able to Quickly Rebuild Credit
- No repayment plan on any of eliminated debts
- Can't Use as a Way to Get Caught Back Up
- Credit Companies Will Close All Current Lines of Credit
- Will not Qualify for a New Mortgage for 2-3 Years
- Doesn't Eliminate Student Loans (without a motion), and Child / Spousal Support
What is the Process of the Chapter 7 Personal Bankruptcy and
What Happens When I File a Chapter 7?
Preparing the Chapter 7 Petition
A typical Chapter 7 bankruptcy case begins with you gathering the documents needed by your bankruptcy lawyer to fill out your bankruptcy petition and related schedules. The Petition and Schedules contain a list of your assets, debts, allowable exemptions, income and expenses, financial and property transactions, and many other things. In order for your bankruptcy attorney to fill out everything correctly he or she will need to have copies of your last 2 years of tax returns, last 90 days of bank statements, last 6 months of paystubs for everyone bringing in an income in the home, your last mortgage statement, if applicable, your last vehicle loan statements, if applicable, and possibly more information depending upon your situation. Your bankruptcy attorney will also probably pull a copy of your credit report so that he or she can quickly get a list of most, if not all, of your creditors as well as related account, balance, and address information. It is very important that you closely review the creditors listed on the related schedule of the bankruptcy petition to ensure that ALL of your creditors have correctly been listed.
Next, your bankruptcy lawyer will ask you a series of questions to make sure that everything in the bankruptcy filing is filled out correctly and there are no issues with your case that would prevent you from obtaining a discharge or the bankruptcy trustee coming after an asset. After, making sure everything is filled out correctly and you have reviewed the petition and schedules thoroughly, you will sign the many signature lines.
Bankruptcy Counseling Requirement
In the 2005 amendments to the Bankruptcy Code, there was a requirement added that all Debtors must obtain credit counseling before filing a bankruptcy. There are many courses available that can be done by computer, phone or paper, but this counseling must be done by a counseling agency that is approved by the United States Trustee's Office and completed within 180 days before filing.
Preparing the Chapter 7 Bankruptcy Means Test
In the Chapter 7 context, the bankruptcy means test is a 2 part test that determines who and who cannot file a Chapter 7 bankruptcy. Your bankruptcy attorney completes the test utilizing the last 6 months of the income coming into your household, the county and state that you live in, the number of people living in your household, certain allowable expenses, and many other factors.
Filing the Chapter 7 Bankruptcy
Next, after you have passed the bankruptcy means test, signed and reviewed all of the completed bankruptcy forms and schedules as well as completed the bankruptcy counseling, your case will likely be filed with the local bankruptcy court electronically and all of your creditors will be notified by mail automatically.
Chapter 7 Bankruptcy Trustee is Appointed / 341 Meeting of Creditors Scheduled
The court will then automatically appoint a trustee, who is assigned by location, to oversee your bankruptcy case as well as schedule the meeting of creditors for you and your attorney to attend. Your attorney then sends information to the trustee to support the information that is contained in your bankruptcy filing. Examples of some things that would probably be sent the bankruptcy trustee might be the last 90 days of bank statements, 60 days of paystubs, your last mortgage and car statements, proof of value of your vehicles and property, the last year's tax return, and anything else pertinent depending upon your situation. The Meeting of Creditors As mentioned previously, when the bankruptcy filing is complete, you will receive notice of your 341 Meeting of Creditor's date, time and location. You will bring your driver's license and social security card to the meeting to verify your identity as well as answer questions from the trustee about your bankruptcy forms under oath. Generally, this meeting is 5 - 15 minutes in length and is pretty routine without any creditors showing up.
Second Bankruptcy or the Financial Management Class
At some point, within 60 days after you file the bankruptcy petition, you will need to complete a second counseling course known as the Financial Management Course. Again, this is very similar to the first class you take and is also required under those 2005 Amendments to the Bankruptcy Code.
Getting Your Discharge in Bankruptcy
As long as there are no issues, after completing the above, you will get your Order of Discharge in Bankruptcy and all of your debts will officially be wiped away.
What Types of Debts Cannot Be Discharged in a Chapter 7 Bankruptcy?
Common things that are dischargeable in a Chapter 7 Bankruptcy include child support, student loans (generally), property taxes, income taxes less than 3 years old, and fines and restitution imposed by a court for any crimes committed by the debtor.
Will I Have to go to Court?
A person's involvement with the actual bankruptcy court and a bankruptcy judge are usually non-existent. Most of the time a person filing a Chapter 7 will not appear in court and will not see the bankruptcy judge unless there is some type of objection or claim of fraud alleged. Usually, the only proceeding at which a person filing a bankruptcy must appear is at the 341 Meeting, commonly known as the meeting of creditors. This meeting is typically only attended by you, your attorney, and the Trustee overseeing the case.
How Will Filing Bankruptcy Affect My Credit?
The filing of a Chapter 7 Bankruptcy stays on the public records section of your credit report for 10 years and a Chapter 13 Bankruptcy remains for 7 years. While it is definitely true that filing for Bankruptcy would make your credit score plummet if you were up to date with all of your debts and had low credit utilization percentages, the majority of people looking at bankruptcy are more than 30 days behind on their bills and are overwhelmed by the balances owed. In these situations, the filing of a bankruptcy may quickly improve one's credit score by eliminating the amounts owed and in a sense, “stop the bleeding.” The process of rebuilding one's credit after filing bankruptcy may be accelerated by opening up and responsibly using a credit card after filing. However, with that being said, the act of filing for bankruptcy will make you unable to get a mortgage for at least 2 years do to underwriting guidelines.
Alex Tuttle has been recognized and rated as a Top Attorney and Distinguished Attorney in the area of Civil Litigation, as well as a Client Choice and Top Contributor by Avvo and regularly, represents clients in Bucks, Chester, Delaware, Montgomery, Lehigh, and Northampton Counties. If you are in need of any assistance or have any questions, please contact us to go over your situation. We would love the opportunity to help you and get your life back to normal.