Understanding Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often called "liquidation bankruptcy," involves the sale of non-exempt assets to pay creditors. This type of bankruptcy is designed for individuals who cannot repay their debts and need a fresh financial start.
Key Features
- Debt Discharge: Most unsecured debts, like credit card debt and medical bills, can be discharged
- Asset Liquidation: Non-exempt assets may be sold to pay creditors
- Means Test: Eligibility determined by comparing your income to state median income
- Automatic Stay: Immediately stops most collection actions, including:
- Foreclosure proceedings
- Wage garnishments
- Utility disconnections
- Collection calls
Pre-Filing Requirements
Credit Counseling
Complete a credit counseling course from an approved provider within 180 days before filing.
Document Collection
Gather these essential documents:
- Recent tax returns
- Pay stubs from the last six months
- Bank statements
- Property deeds
- Vehicle titles
- Credit card statements
- Medical bills
- Loan documents
- List of assets and liabilities
The Filing Process
1. Determine Eligibility
Pass the means test and verify you haven't filed for:
- Chapter 7 bankruptcy in the past eight years
- Chapter 13 bankruptcy in the past six years
Note: If you don't qualify for Chapter 7, Chapter 13 bankruptcy might be a better option.
2. Complete Bankruptcy Forms
File required documents found on the U.S. Courts website, including:
- Voluntary Petition (Form 101)
- Schedules A-J
- Statement of Financial Affairs
- Statement of Intention
3. File Your Petition
Submit paperwork to your local bankruptcy court with a filing fee of $338 (as of 2023). Fee waivers or installment payments may be available for those who qualify.
Post-Filing Requirements
Meeting of Creditors (341 Meeting)
- Occurs 21-40 days after filing
- Mandatory attendance with trustee
- Answer questions about your financial situation under oath
- Bring identification and proof of social security number
Financial Management Course
Complete a debtor education course within 60 days after your meeting of creditors.
Important Considerations
Non-Dischargeable Debts
Some debts cannot be eliminated through Chapter 7:
- Most student loans
- Recent taxes
- Child support
- Alimony
- Court-ordered restitution
Impact on Credit
- Remains on credit reports for 10 years
- Initial credit score drop of 100-200 points
- Recovery possible within 2-3 years with proper management
After Discharge
Rebuilding Your Financial Life
- Create a realistic budget
- Start an emergency fund
- Consider a secured credit card
- Monitor your credit reports regularly
- Live within your means
Timeline Expectations
- Most cases complete within 4-6 months
- Discharge order typically arrives 60-90 days after meeting of creditors
For more information and resources, visit the American Bankruptcy Institute or American Bar Association for free or low-cost legal assistance.