What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a federal court proceeding under chapter 7 of the U.S. Bankruptcy Code. Filing under this chapter allows you the opportunity to obtain a “fresh start.” Once your debts are wiped out (“discharged”) in bankruptcy, you will be able to move forward without the burden of debts you cannot pay. You will have no remaining liability for the debts that are discharged.

To obtain a chapter 7 discharge the law requires that you give up your property so that it can be liquidated (sold and turned into cash) for the benefit of your creditors. However, much of your property is “exempt” property that the law allows you to keep. In fact, in most cases, all of your property will be exempt. In other words, in most chapter 7 cases, you will be able to discharge your unsecured debts and keep most or all of your property.  Still, you should keep in mind that if you have substantial, valuable property and you are filing for chapter 7, you will probably need to turn over some of that property to the trustee to be sold for the benefit of creditors.

It is important to understand that not everyone qualifies for chapter 7. If your income is above the median for your state, you will be required to pass the “means” test before being allowed to file for chapter 7. (The median income in the District of Columbia right now is $42,270 for a one-person household and $68,892 for a two-person household.) If your income is below the median for your state, you are automatically eligible to file and do not need to take the means test. The means test was added to the bankruptcy laws in 2005 to try and stop wealthy debtors from discharging debts without paying anything back to creditors. (This was not nearly as big a problem as certain legislators believed, but that was their rationale for changing the law.) Under the means test, if the debtor earns too much money in relation to expenses, the debtor will be required either to forgo bankruptcy entirely or to set up a payment plan through chapter 13.

Even for those who pass the means test and qualify for a chapter 7, not all debts will be discharged. Certain categories of debt are non-dischargeable under the Bankruptcy Code and survive the bankruptcy. For example, domestic support obligations, recent income taxes, and student loans cannot be discharged.

In addition, chapter 7 does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. For that reason, if you are behind on the mortgage or car loan payments and want to keep the home or the car, a chapter 7 case may not be the right choice for you and you may wish to consider a payment plan under chapter 13.

Filing a chapter 7 case triggers the “automatic stay.” This stops all collection actions including foreclosures, garnishments, attachments, lawsuits, and collection calls.  In most cases the automatic stay remains in effect until the case is closed. If creditors continue to contact you after the automatic stay goes into effect, they can be held liable for “stay violations” and can be sued under different sections of the code.

About five weeks after the petition is filed, the chapter 7 trustee will hold a “meeting of creditors.” This meeting has that name because creditors can show up and question the debtor.  But creditors rarely attend. This meeting is usually a short and non-threatening meeting where the trustee confirms some of the information provided in the bankruptcy filing. The judge is not present. As long as the information provided to the trustee is truthful and complete, and all required documents are submitted, the meeting of creditors should go smoothly. This is usually the only time a chapter 7 debtor is required to appear in court.

About four months after the case is filed the discharge will be handed down. This will release you permanently from personal liability for most debts and it will prevent creditors from taking any collection actions against you for those debts.

For more information, give me a call at (202) 559-0259 to set up a free consultation.