How Chapter 7 Bankruptcy Works

A chapter 7 bankruptcy case begins with the consumer submitting a petition with the bankruptcy court serving the area where the consumer resides or where the business debtor is formed or has its primary place of business or primary assets. In addition to the petition, the debtor must definitely additionally file with the court: listings of assets and liabilities; a schedule of current wages and spendings; a statement of financial affairs; and a schedule of executory contracts and unexpired leases.

Debtors must also provide the nominated case trustee with a photocopy of the tax return or reproductions for the most recent tax year as well as tax returns filed during the case (including tax returns for preceding years that had not been filed when the case got going).

Individual debtors with primarily consumer debts have additional document filing demands. They must file: a certificate of credit counseling and a copy of any debt payment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any predicted rise in earnings or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition or individual petitions.

Even if filing jointly, a husband and wife are subject to all of the document filing prerequisites of individual debtors.

The courts must definitely levy a $ 245 case filing fee, a $ 46 miscellaneous admin fee, and a $ 15 trustee additional charge. Customarily, the fees must be paid to the clerk of the court upon filing. With the court’s permission, however, individual debtors may make payment in installments.

The number of installments is limited to four, and the debtor must make the final installment no later than 120 days just after filing the petition.

For cause presented, the court may extend the time of any scheduled payment, provided that the last payment is remitted not later than 180 days after filing the petition. The debtor may also pay the $ 46 administrative charge and the $ 15 trustee surcharge in installments. If a joint petition is filed, only one filing charge, one administrative charge, and one trustee surcharge are charged. Debtors should be aware that failure to pay these costs might result in dismissal of the case.

If the debtor’s wages is less than 150 % of the poverty level (as established in the Bankruptcy Code), and the debtor is not capable to pay the chapter 7 fees even in installments, the court may waive the condition that the fees be paid.

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In order to finish the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must provide the following information:

  • A list of all financial institutions and the sum and makeup of their claims;
  • The provider, amount, and regularity of the debtor’s income;
  • A list of all of the debtor’s property; and
  • A detailed list of the debtor’s monthly living expenses, i.e., food stuff, clothing, living arrangements, utilities, assessments, transportation, medication, etc.

Married individuals need to get together this info for their spouse regardless of even if they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files bankruptcy, the salary and expenses of the non-filing spouse are mandated so that the court, the trustee and financial institutions can evaluate the household’s fiscal position.

In connection with the details that an individual debtor will file is a schedule of “exempt” property. The Bankruptcy Code allows an individual consumer to shelter some property from the claims of creditors because it is exempt under federal bankruptcy statute or part of the laws of the debtor’s home state.

Many states have indeed taken advantage of a provision in the Bankruptcy Code which enables each state to choose its own exemption law in place of the federal exemptions. In more jurisdictions, the individual debtor has the choice of choosing amongst a federal package of exemptions or the exemptions to be found under state law. Thus, no matter if certain property is exempt and could be kept by the debtor is oftentimes a topic of state law. The debtor needs to consult a legal professional to establish the exemptions available in the state specifically where the debtor lives.

Filing a petition under chapter 7 “automatically stays” (stops) most collection acts against the debtor or the debtor’s property.

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But filing the petition does not stay certain types of actions and the stay may be effective only for a short time in some situations. The stay develops by operation of law and requires no judicial action. As long as the stay is in effect, creditors typically may not initiate or continue legal actions, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are furnished by the debtor.

Between 21 and 40 days subsequent to the petition is filed, the case trustee will certainly hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator organizes the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the gathering may be held no more than 60 days after the order for relief.

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Throughout this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The debtor must absolutely attend the meeting and answer inquiries regarding the debtor’s financial affairs and property.

If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and respond to inquiries. Within 10 days of the creditors’ meeting, the U.S. trustee will publish to the court whether the case should be presumed to be an abuse under the means test.

It is important for the debtor to cooperate with the trustee and to provide any financial files or papers that the trustee demands. The Bankruptcy Code obligates the trustee to ask the debtor questions at the meeting of creditors to make sure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit record, the option to file a petition under a different chapter, the ramification of getting a discharge, and the consequence of reaffirming a debt. Some trustees provide written information on these subjects at or before the meeting to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are excluded from attending the meeting of creditors.

In order to accord the debtor full relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to a case under chapter 11, 12, or 13 as long as the debtor is suitable to be a debtor under the new chapter. Nevertheless, a condition of the debtor’s voluntary conversion is that the case has not previously been converted to chapter 7 from another chapter.

Thus, the borrower will not be enabled to switch over the case repeatedly from one chapter to another.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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