When filing for Chapter 7 Bankruptcy protection, debtors can expect to have to turn over a sizeable portion of their property to a so-called bankruptcy estate. A bankruptcy trustee manages this bankruptcy estate, selling property to raise money to pay off a debtor’s creditors.
To begin the Chapter 7 Bankruptcy process, you will need to pass a Means Test, file an official petition and create a detailed statement of your income and expenses. You must list all of your debts, even if you intend to pay them off. You must also create a list all of your property, any debts secured by that property, and the sales value of the property. Note that property means all of your assets and valuable possessions, not just real estate. That said, bankruptcy law allows debtors to keep a certain amount of property after going through bankruptcy proceedings. This is called “exempt” property – it is exempt from the bankruptcy estate. You will usually get to keep your home, car, pension, personal belongings, equity in your home, etc. Non-exempt property that usually has to be given up includes bank accounts and investments, family heirlooms, valuable collections, a second car, a vacation home, etc.
All of this paperwork gets filed with the Bankruptcy Clerk in the district you live in. The court will appoint a trustee and gives notice to all creditors listed in your schedules that you have filed for bankruptcy. You will get a copy of that notice at the same time as your creditors. An automatic stay will then go into effect that creates a legal barrier to collection actions by the creditors.
Meeting of Creditors
Next you will be scheduled to attend a “first meeting of creditors” where the trustee and creditors can ask questions under oath about assets and liabilities. Creditors actually rarely attend these meetings, but be aware that they can attend and ask questions. After this meeting the trustee will take control of non-exempt property. Often, they will offer to sell it back to you. From the sale of assets, the trustee pays the expenses of the administration of the case and distributes any remaining funds to creditors with allowed claims, according to the priority of the claims. Any wages earned after the case has begun belong to the debtor and are beyond reach of creditors.
Chapter 7 Bankruptcy does not eliminate liens on assets that the debtor brought to the bankruptcy. Thus, you must declare what your intentions are in respect to secured debts, whether that is to return, redeem or reaffirm property that has been used as collateral. Additionally, certain debts will survive a Chapter 7 Bankruptcy because they are exempted by law. These would include taxes, family support, student loans and liens.
Creditors and the trustee have a 60 day period from the initial meeting of creditors in which they may challenge the debtor’s right to discharge. Unless an action is filed, the court issues a discharge of debts shortly after the 60 day period expires. Debtors must complete a financial education course in order to receive the discharge. Failure to submit the certificate of completion for the class can result in the case being closed without discharge. The entire process usually takes 4-6 months from the time the case is originally filed until is it discharged. A Chapter 7 Bankruptcy will remain on your credit report for ten years and you can’t get another Chapter 7 Bankruptcy discharge if you obtained a discharge of your debts in a Chapter 7 Bankruptcy case within the last eight years.