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What is a Chapter 7 Bankruptcy?

Chapter 7 bankruptcy provides you, the debtor, relief from overwhelming financial obligations by granting a discharge of your qualified unsecured debt. It gives you the chance to reset your financial situation and get a Fresh Start on your finances.

A Chapter 7 Bankruptcy is also known as a "liquidation" chapter because any of your personal property, or assets, that is nonexempt is sold through the process of liquidation. The money collected from liquidation is used to pay off your creditors. Many states provide several exemptions which allow you to keep your home, car(s), retirement plans, and other personal belongs.

Bankruptcy in America has existed for more than 200 years. It was first signed into Federal law in 1800 based on the proposition that your future income should belong to you, rather than your creditors.

With the debt relief laws put in place during the COVID-19 epidemic, bankruptcies have decreased significantly. However, when those laws are repealed as the economy recovers, financial speculation is that bankruptcies will increase in number significantly.

Collection agencies may argue that you must repay your debt. However, once your debts have been discharged under Chapter 7, you are no longer responsible for them. These debts can include:

  • Surrendered real property
  • Surrendered Cars
  • Surrendered Secured personal property
  • Medical Debt
  • Credit Card Debt
  • Loans
  • Judgments in some lawsuits

The Chapter 7 Bankruptcy Filing Process

There are multiple chapters in which a person or entity, such as a corporation, can file for bankruptcy protection…. Chapter 9, 15, 11, 12, 13 and of course Chapter 7. Chapter 7 is the most common type of bankruptcy because most people qualify.

What is the Chapter 7 Bankruptcy process?

  1. Retain an attorney.
    1. The attorney should be in good standing in your state.
    2. The attorney's primary practice area should be Bankruptcy Law.
    3. The attorney should be affiliated with a consumer /bankruptcy entities such as NACBA, NACA or other groups that focus on bankruptcy and consumer protection. The consultation should be for free, many attorneys provide for free consultation.
    4. The attorney should be versed in consumer law as well : FCRA (Fair Credit Reporting Act) FDCPA ( Fair Debt Collection Practice Act); Telephone Act, etc.
    5. Confirm if the attorney will represent you in an adversary proceeding (complaint filed against you in the bankruptcy court), work on your credit report after bankruptcy, represent you in any violations of the discharge order (creditors violating your bankruptcy rights after your debt has been discharged).
  2. Required Documents
  3. In order to properly manage your case, your lawyer will need the following documents:

    1. Six (6) months of pay stubs (or income information)
    2. Two (2) years of tax returns
    3. Three (3) months of bank statements
    4. Title/deed information and Statements for your car(s), home, time share, and/or land.
    5. Life insurance information.
    6. Divorce decrees.
    7. All creditor information which includes summons, complaints and judgments.
    8. Business information, profit and loss statements, and tax returns for your business.
  4. Payment of Attorney's Fees
  5. An attorney is not allowed to be a creditor and an attorney at the same time. Therefore, all attorney fees must be paid in full.

    An attorney should allow for monthly installments but the actual electronic filing of the petition on the bankruptcy court website, Pacer, will not occur until the fees have been paid in full.

    Attorneys are NOT allowed to use credit cards from the client as payments, but may use credit cards from a third party.

  6. Filing the Bankruptcy Documents
    1. Once you've provided your attorney with the complete list of documents above and made the payments as contracted in full, you will be required to take a credit counseling class. The class is 30 minutes long an can be completed online or by phone. You are required to attend the class before the filing of your petition).
    2. Your attorney will prepare your petition and call you to schedule a signing appointment.
    3. Your Bankruptcy Petition is usually about 60 pages and it can't be filed until you've reviewed it, had it explained to you, and you've signed all of the proper areas.

      Signing the petition requires that the information that you provided is complete and that your attorney draft is true and correct under penalty of perjury. You have to know what you're signing, because you're the one who will be held responsible for following the terms of your bankruptcy, not your attorney.

      After the petition is signed, your petition should be filed shortly thereafter but certainly no longer than 5-7 days after signing the petition.

  7. Court
  8. Most clients are relieved once the petition has been filed. At that point, their automatic stay (bankruptcy protection) is not in full effect. The work for the court and your attorney, however, is just beginning.

    You will receive your court date in 5-7 days after the filing of your petition. The court date is normally 30 days after the filing of the petition. Neither you nor your attorney can control the date or time of your 341meeting (meeting of the creditors).

    The 341 hearing is not before a judge but before a Trustee (another attorney) who sits on behalf of your creditors.

    Normally the 341 meeting itself takes about 2-5 minutes in which the trustee asks basic yes or no questions that your attorney should have already have asked you several times about your real and personal property. Although the meeting with the trustee is normally short, the waiting time to be examined by the trustee could take hours.

    You, as the debtor, must arrive early and bring your social security card and photo id. The social security card should be signed, reflect the same name that is on the petition, and your photo id (driver's license) should be current, and should have the same address that is on the petition. The trustee will either "Close the 341 Meeting" meaning that he is satisfied that your questions are truthful and correspond with the information in the petition, or he will "adjourn the 341 Meeting" in which to seek additional information and confirmation that the information in the petition is true and accurate.

    Usually, the 341 meeting is closed and you will receive your discharge order in the mail in approximately 60 days (if no other creditor has filed an objection to you receiving your discharge).

A Chapter 7 bankruptcy is normally uneventful. In most cases, creditors won't show up for the 341 meeting, the trustee will close the meeting the same day, and no creditors should object to your discharge.

However, there are no guarantees that you'll receive your discharge, or that you won't be subject to additional scrutiny from creditors or the trustee. It's important to be truthful with your attorney and disclose any and all information to them, whether it's relevant or not.

People from all walks of life file for bankruptcy. From police officers and detectives, to lawyers, doctors, bankers, teachers, and more, bankruptcy isn't uncommon.

The purpose of bankruptcy is to eliminate debt that is preventing you from leading a successful and healthy life. It gives you a fresh start to allow you to regain your financial future.