When you file for Chapter 7 bankruptcy, the objective is to get as many debts as possible “discharged.” Once the debts are discharged, you can no longer be held personally liable for them. The purpose of Chapter 7 bankruptcy is to provide certain debtors who are facing severe hardship with the ability obtain a fresh start, free of creditor harassment, the threat of lawsuits, and overwhelming debt. Certain debts are non-dischargeable through bankruptcy. These include alimony, child support, and criminal restitution.
Another advantage of filing Chapter 7 bankruptcy is the “automatic stay.” The stay is an injunction against creditors and debt collection agencies, ordering the mandatory cessation of all their collection efforts, including harassing phone calls, correspondence, and filing or maintenance of debt collection lawsuits. During the stay creditors may not garnish your wages, foreclose on your property, repossess your vehicle, or cut off your utilities unless they file a motion to lift the stay.
Who Can File for Chapter 7 Bankruptcy?
You are only eligible to file for Chapter 7 bankruptcy if you pass the means test. This test is designed to prevent people with substantial incomes from filing for Chapter 7 bankruptcy when they actually do have the means to pay off their debts. The means test requires you to figure out whether your income is more than the median income of your state. If you do not earn more than the median, you can file for Chapter 7 bankruptcy. If you do earn more than the median, you need to calculate whether you have enough disposable income to repay your debt after subtracting your basic expenses.
Even if you do pass the means test, you cannot obtain a Chapter 7 bankruptcy discharge if you filed for Chapter 7 within the eight years prior to the second filing. You also cannot receive a second discharge within two years of filing for Chapter 13 bankruptcy.
How Does Chapter 7 Bankruptcy Work?
A Chapter 7 bankruptcy case starts by filing a packet of papers, including the bankruptcy petition. Among other things, you will provide a schedule listing which items of property are “exempt” under the applicable exemption system. “Exemptions” provide protection to a certain amount of your property, in recognition of the fact that a fresh start would not be helpful if you could not retain some basic necessities. In general, property that is nonexempt or substantially nonexempt can be sold to pay off your creditors. There is a federal exemption system that some states permit debtors to use, as well as state exemption systems.
Once you file for bankruptcy, the automatic stay will go into effect. If a creditor contacts you, you can notify it that you filed for bankruptcy. It is illegal for creditors to continue contacting you once they know of your case.
A bankruptcy trustee will be appointed to administer your case and represent the bankruptcy estate. The trustee has a number of duties, potentially including objecting to your exemptions, avoiding any transactions you took to prefer, defraud, or hide assets, objecting to inappropriate creditors’ claims, or preserving and liquidating estate assets as appropriate. In most states, the trustee is supervised by the Office of the United States Trustee, but in Alabama and North Carolina a bankruptcy administrator performs the same tasks.
After filing, there will be a meeting of creditors that you must attend. Usually within a few months of this hearing, you receive a bankruptcy discharge. Most Chapter 7 cases take 4-6 months. Although the trustee can object, only the court can deny your discharge.