Chapter 7 Bankruptcy Process
This process list will ensure you have everything in order before filing for Chapter 7 bankruptcy and know what to expect during the process.
Step 1: Weight the Pros and Cons of Chapter 7 Bankruptcy
Consider these pros and cons before filing for Chapter 7 bankruptcy.
- Eliminates all debt that is eligible for discharge (exceptions include tax debts, child support, alimony, and student loans)
- No Repayment Plan
- Further income will belong to the debtor (180 day exclusions after filing for the following items: inheritances, insurance settlements, proceeds from a divorce settlement)
- Bankruptcy is usually complete in three months
- Not all debts can be discharged
- Bankruptcy stays on your credit report for up to 10 years
- Cosigner of a loan may become liable for your debt
- Trustee may sell the debtors nonexempt property and distribute the proceeds among creditors
Step 2: Examine Alternatives to Filing for Chapter 7 Bankruptcy
Consider these alternatives before filing for Chapter 7. These may be more beneficial to you depending on your situation.
- Judgement Proof – A debtor with little money or nonexempt property which creditors can take to satisfy a court judgement is considered judgement proof. In these cases it is beneficial for for the debtor to not file for Chapter 7 bankruptcy
- Negotiate with Creditors – If you can negotiate with creditors for forgiveness or a new repayment plan then do this instead of filing for chapter 7
- Consider Chapter 13 Bankruptcy – Chapter 13 allows a debtor to repay debts over time. A court will approve of a repayment plan in which the debtor will adhere to. In Chapter 13 Bankruptcy the debtor can usually keep their property.
Step 3: Determine Eligibility
You must pass one of the 2 part means test in order to qualify for Chapter 7. If your average income for the six months preceding your filing is less than or equal to the median income of the state in which you live, then you can file for chapter 7 within your state. If your income is too high then you must pass the second part of the means test. The second part of the test is an assess on weather your disposable income is able to pay some creditors.
Step 4: Assess Your Property
The Bankruptcy court will obtain jurisdiction over property the debtor owns once Chapter 7 is filed. The court may sell nonexempt property in order to pay creditors while exempt property cannot be used to repay debts. Keep this in mind before filing for Chapter 7.
Nonexempt Property Includes:
- Family Heirlooms
- Bank Accounts
Exempt Property Includes:
- Amounts of equity in a home
- Necessary clothing
- Trade or progression tools
- Public benefits
- Household appliances
Step 5: Reaffirm, Redeem, or Surrender Secured Debt
Debts secured by collateral are considered secured debts. These give creditors the right to take the property if the debtor does not pay the debt. In bankruptcy you will need to decide to reaffirm, redeem or surrender your secured debt.
- Reaffirming allows you to keep the property the debt is owned on after entering into a new repayment agreement with the creditor.
- Redemption allows you to keep the property by paying the current value of the property.
- Surrendering the property will give it back to the creditor.
Step 6: Seek Credit Counseling
Debtors must attend credit counseling by an approved agency within 180 days before filing for bankruptcy. Counseling will help debtors decide which bankruptcy option is right for them or whether alternatives are more beneficial.
Step 7: Gather Documents and File Paper Work
Filing for bankruptcy requires documents on income, debts, and property you own. You will need to submit a certificate to prove proof of credit counseling, as well as your most recent income tax returns, list of creditors, and a wage stub. Once all paper work is filed the bankruptcy process begins. In emergencies such as home foreclosure, bankruptcy can be filed for without submitting the necessary paperwork.
Step 8: Attend Meeting with Creditors
Once filed, the bankruptcy trustee will confirm a time for the debtor to meet with creditors. Creditors and trustees may ask questions of the debtor about bankruptcy documents and other relevant information. This is usually the only time the debtor appears in court.
Step 9: Attend Personal Financial Management Counseling
Like the counseling before filing for bankruptcy, in order to receive bankruptcy discharge the debtor must attend personal finance management course approved by the U.S. Trustee’s office and produce a certificate of completion.
Step 10: Receive the Discharge Notice
Usually two to three months after Chapter 7 bankruptcy is filed, the debtor will receive a Notice of Discharge from the court. Debtors are no longer responsible for their discharged debts.