How Chapter 7 Bankruptcy Works

In Chapter 7 bankruptcy, the Court cancels many (or all) of your debts. In rare cases, it might also sell some of your property to pay your creditors. The vast majority of my clients lose none of their property in Chapter 7.

Who can file

You won't be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan. That is determined by the Means Test, a convoluted analysis of your income and expenses.

The bankruptcy petition

You and your attorney will work together to gather information on your income and expenses, the debts you owe (whether secured, unsecured or priority), the value of property you own, what state law exemptions you claim to protect your property and questions about your recent financial history. For many of my clients the gathering of this information is the hardest part of the process.

The automatic stay

After you file for Chapter 7 bankruptcy (or Chapter 13 bankruptcy), the U.S. Bankruptcy Court issues an "Order for Relief" — known informally as the "automatic stay". The automatic stay immediately stops  creditors from trying to collect on their debts. So, at least temporarily, creditors cannot legally garnish your wages, empty your bank account,  cut off your utility service, start or continue a lawsuit against you, or go after your car, house or other property. The automatic stay is tremendously useful tool provided by the bankruptcy laws.

The §341 Meeting of Creditors

About 4 weeks after you file your petition, you and your lawyer will attend a hearing, presided over by the bankruptcy trustee. This is an official whose job it is to verify the truth of the information in your petition, determine if you have any non-exempt property worth selling, and if so, to sell it. In the vast majority of cases, your lawyer and the trustee work out any issues or questions the trustee may have, obviating any need to appear in Court before the Judge.  The trustee runs the creditors meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 bankruptcies, this is the debtor's only visit to the courthouse.

How your secured debts are treated

If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and cars. These debts generally cannot be cancelled unless you intend to give the collateral to the lender. For the exceptions to this rule, you should talk with your attorney.

If a creditor has recorded a lien against your property because of a debt you haven't paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy.

The Chapter 7 Bankruptcy Discharge

At the end of the bankruptcy process, all of your debts are wiped out (discharged) by the Court, except: back child support, most recent tax debts, student loans, and any debts that the Court has specifically declared nondischargeable due to the creditor having proved that you committed fraud in the incurring of  that debt. (This is extremely rare in my experience.)

Another benefit of filing bankruptcy

Even if you are judgment proof, you may want to file for bankruptcy to clear the decks for your next foray into the world of credit. Although it’s hard to say right now how soon you can reestablish your credit after bankruptcy—because of the credit crunch that has accompanied the foreclosure crisis—there is little doubt that you will be able to get back on the credit track sooner by filing for bankruptcy than by ignoring your debts. While this might not be the best reason to file for bankruptcy, many people want to rebuild their credit just as soon as is humanly possible.

For answers to other questions you may have, feel free to visit the other pages listed under the "About bankruptcy" link. It's found at the top of every page on our site.