Chapter 7 bankruptcy is a petition by a debtor seeking relief through the bankruptcy court from debts owed that cannot be repaid. Petitioners must prove insolvency, the inability to pay off debts, by reporting to the court all of their creditors' names, addresses, and amounts owed as well as the debtor's income and assets.
Chapter 7 Bankruptcy Eligibility
A means test is given to determine if a petitioner is worthy of relief through a Chapter 7 bankruptcy. The name comes from the test's goal of determining if an individual has sufficient "means" to pay debts. The test compares debtors' average income over the past 6 months with the average income of other residents in their state or the median income. If the debtor's income is less than or equal to the median income of their state, they are eligible to file for Chapter 7 protection.
If the means test indicates the debtor's income is more than the state median amount, other factors are then taken into consideration. More information is sought in order to determine the debtor's disposable income which includes standardized or actual expenses that are included with the debt. If the debtor can pay $10,950 over 10 years, or $182.50 for 120 months, then a Chapter 13 resolution plan is in order.
Types of Debt Chapter 7 Covers
You may list secured loans, such as mortgages and car loans, or unsecured debt that doesn't require collateral such as medical bills, credit cards, or personal loans.
Steps Along the Chapter 7 Process
These are the steps that debtors should expect to take when beginning the process of filing for Chapter 7 bankrutcy:
- The debtor files for Chapter 7 bankruptcy by filing official papers with the court, giving complete information of the petitioner's financial affairs. This information includes a listing of all creditors with their names, addresses, and amount owed plus proof of income over the past 6 months.
- The debtor and creditors attend the first meeting of creditors, called a "341 meeting," where the court trustee and creditors ask the debtor questions under oath.
- If it is determined that the debtor has assets that can be sold and distributed to the creditors, the trustee takes possession of them, sells them, pays administration costs, and distributes the balance to the creditors according to priority.
- After the 341 meeting, the debtor's only responsibility is to provide additional information to the trustee if requested.
- The debtor is required to redeem, return, or reaffirm secured properties as agreed.
- Creditors have 60 days from the 341 meeting to dispute the discharge of their debt or the debtor's right to a discharge by filing a petition for an adversary proceeding, a formal legal objection to the court's findings.
- Debtors are required to earn an approved financial education course certification before receiving a Chapter 7 discharge.
Length of Chapter 7 Bankruptcy
The discharge occurs 4 to 6 months from initial filing unless there is a backup of cases.
This short overview of Chapter 7 bankruptcy only presents a brief idea of what is involved. Your best option is to speak with a bankruptcy attorney about your particular situation before filing.
