If you have never filed for bankruptcy before or have a vague notion of what a bankruptcy is or what happens when you file, getting a stronger sense of what to expect when filing a Chapter 7 bankruptcy will allay many of your concerns.
Chapter 7 is a liquidation proceeding. It can be used by individuals to eliminate unsecured debt or by any business entity, including corporations, if they wish to dissolve their business and discharge as much debt as possible while retaining as much personal property as is permitted.
What Happens Before I File?
Before you can file, you have to qualify by passing a means test. Your income needs to be below the median income for whatever jurisdiction you live, or else pass a test based on your expenses and income to arrive at a level of disposable income that can qualify you or not. If you do not pass, you can still file under Chapter 13.
In the 180-day period before you file, you must take and complete a credit counseling course. This is a short, informational class or session that can be completed in-person, online or even on the phone. Your attorney can provide you with a list of approved agencies or your attorney’s office may qualify. A small fee may be charged or waived if you can show financial hardship.
What Information Needs to be Disclosed?
When filling out your petition, you are obligated to provide certain information under oath or penalty of perjury, including the following:
List current assets and liabilities
Income and sources
Any executory contracts and unexpired leases
A schedule of exempt assets
These are the essential data needed by the bankruptcy court and trustee to determine if any of your assets are subject to being seized and for any creditors to object to the discharge of debts owed to them.
What Happens When I file?
When you file your petition and documents, an automatic stay goes into effect. Creditors will be advised of your filing and will cease calling or contacting you in any way and will have to stop any court proceedings or collection actions, including wage garnishments and bank levies.
When you file, you provide a list of your assets as well as of your debts. Your property or assets are either exempt from being seized by the appointed bankruptcy Trustee or not. Depending on your state, your home’s equity may be entirely exempt or subject to a limited exemption. There are also caps or values placed on individual assets such as automobiles, furniture, retirement plans, bank accounts, life insurance proceeds,, tools of the trade, firearms and others. Most debtors are able to keep most if not all of their property. Any real estate that is not your homestead is not exempt.
341(a) Meeting of Creditors
The court will send you a notice for a meeting of creditors, which may be held at the bankruptcy court or other public building. You will be with your attorney as well as other debtors and their lawyers. When your case is called, you will sworn in by the Trustee and be asked to provide your driver’s license or identification card with photo and to answer a series of routine questions asked by the Trustee about the property you listed in your petition.
Creditors may be present at this meeting to ask you questions about any secured collateral you may have with them but this is not common.
Any creditor who claims you may have committed fraud or that you incurred certain debt with no intent to repay it may file an objection to the discharge of their debt within 60-days after the date of meeting of creditors.
The Trustee can also object to any claimed exemptions, so long as he or she does so within 30-days of the initial date for your creditors’ meeting.
Financial Management Course
After you file, you are obligated to take and complete a financial management course. This is typically a two-hour course. Upon completion, the administrator will file a certificate of completion within 45-days of the date initially set for your 341(a) meeting.
If you have a secured loan such as for your car, you will need to sign a reaffirmation agreement with the creditor and continue making your monthly payments or surrender the collateral.
Discharge of Debts
If all goes smoothly and no one files an objection to a discharge of debt or to any valuation of your claimed exempt assets, you will receive a Notice of Discharge in about 2-6 weeks after the 60-day period for filing an objection to discharge has expired. When you receive your Notice, all dischargeable debts, including your unsecured debt such as credit cards and medical expenses, are discharged.