Filing For Chapter 7 Bankruptcy – The Process
When people talk about bankruptcy in the US, they are usually referring to Chapter 7 bankruptcy. Chapter 7 Bankruptcy is by far the most common type of bankruptcy that is filed in America. It is also known as “straight” or “liquidation” bankruptcy and it discharges most debts like medical bills, personal loans as well as credit card debt.
What happens in Chapter 7 Bankruptcy?
When you apply for Chapter 7 bankruptcy, almost all your assets are sold and the money generated from the sale is used to pay back your creditors. The reason why “almost all” and not all your assets are sold is because you are left with just enough exempt property to begin anew and get a “fresh start”.
Who qualifies for Chapter 7 Bankruptcy?
Not everyone can qualify for Chapter 7 Bankruptcy. Since 2005, Federal laws changed a lot, making it harder for people to apply. Now, if a debtor doesn’t meet the qualification criteria, then the court can convert his/her case to a Chapter 13 bankruptcy case.
Here are a list of criteria that will qualify a person for Chapter 7 bankruptcy:
- You must clear the Bankruptcy Means Test. If your income is too high (higher than your state’s median income), you will probably not be allowed to petition for a Chapter 7. Having a higher income means you are capable of clearing a least some of your own debt.
- You must be an individual/married couple/small business owner. Corporations/LLCs or partnerships are not allowed to file for Chapter 7 bankruptcy.
- You have not had a recent bankruptcy discharge. If you had filed for a Chapter 7 in the last 8 years of a Chapter 13 in the last 6 years, then you cannot ask for another round of bankruptcy.
- If you had a bankruptcy dismissal in the last 180 days, then you cannot file for Chapter 7 bankruptcy. A dismissal means that you either:
- Violated a court order
- Abused the system
- Committed fraud with a fake bankruptcy filing
- Asked for a dismissal since your creditor asked for the automatic stay to be lifted
- Must receive credit counselling more than 180 days before your bankruptcy discharge. This counselling program must also include a 2-hour financial management course to teach you to manage your finances properly. If you do not go through this part of the process, your bankruptcy case will be dismissed.
Filing for Bankruptcy – the process
This is a very brief overview of the process of filing for Chapter 7 Bankruptcy:
- You begin by filing a petition at the Bankruptcy Court. You will need to submit a List of Documents along with your petition
- You will need to pay a case filing fee, a trustee surcharge as well as miscellaneous administrative fee. You can make these charges in installments, however, the maximum number of installments allowed are 4. Additionally, these fees must be paid within 120 days of the petition being filed. An exception may be made for show cause, but the extension does not go beyond 180 days.
- Once you file your petition an automatic stay gets activated where your creditors can no longer ask you for money.
- Your trustee will hold a meeting with your creditors between 20 and 40 days after your petition is filed. To ensure that bankruptcy judges are completely impartial, they are not allowed to attend these meetings.
If you meet all the eligibility criteria and follow the process correctly, your petition for Chapter 7 Bankruptcy will be accepted and your debt will be discharged.