Filing for Bankruptcy under Chapter 7 is a basic liquidation. It is available to individuals and businesses. The process begins by filing a bankruptcy petition. At that time a judge and Interim Trustee are assigned to the case. The Interim Trustee will examine the debtor’s petition, schedules, and assets to determine if any nonexempt property exists. If there is nonexempt property, the Interim Trustee will liquidate or sell the property and distribute the proceeds to the creditors. Due to Federal and State exemption laws, most or sometimes all of a debtor’s assets are protected (exempt). This sometimes results in most creditors’ debts unpaid when there are not enough assets to cover liabilities. If all of a debtor’s assets are exempt, this is referred to as a “no asset” case. This usually results in most creditors’ debts not being paid anything.

Certain transfers of property made by the debtor within 90 days before filing (within one year in the case of relatives or other “insiders”) can be recovered by the trustee for the benefit of creditors through bankruptcy court litigation. It is very important to be honest and disclose these transfers to your attorney prior to filing. Often pre-bankruptcy planning can help deal with these potential issues.

The Bankruptcy court will also notify the creditors by mail about the bankruptcy when the petition is filed. Once your petition is filed, you are under protection of the Court. Creditors may not call you, mail you bills, sue you, garnish your wages or cut-off your utility service. Any actions, including foreclosure actions, are stopped and cannot proceed further without special permission from the bankruptcy court.

About 30 to 45 days after the petition is filed, a Meeting of Creditors is held. The debtor is required to attend this meeting.This meeting will last only five or ten minutes. The trustee will ask the debtor questions about the bankruptcy forms and the debtor’s financial situation. Creditors rarely attend this meeting.

About 8-10 weeks after the meeting of creditors the debtor will get a discharge order in the mail, which completely eliminates the debtor’s dischargeable debt. Chapter 7 bankruptcy is often referred to as “fresh start” bankruptcy, where your debt is discharged and does not have to be repaid. At this point the debtor can rebuild your credit and move forward in your life with a fresh start. Certain debts — such as sales taxes and other trust-fund taxes (e.g., employer withholding tax), debts created by a debtor’s intentional conduct (e.g., assault, defamation, embezzlement or fraud), parking violations, fines, penalties and criminal restitution, alimony and child support obligations, and guaranteed student loans, among other items — are not discharged in most cases and are unaffected by a Chapter 7 bankruptcy filing. More often than not, most usual types of consumer debts are discharged through a Chapter 7.

Common Questions About Chapter 7 Bankruptcy

  • Eliminate the legal duty to pay most or all of your unsecured debts. This is called a "discharge" of debts.
  • Re-connect utility services or stop a pending utility disconnection.
  • Protect wages from garnishment.
  • End creditors from harassing you with collection notices and constant phone calls.
  • Stop real estate foreclosure.
  • Stop vehicle repossession.

Chapter 7 cannot eliminate certain rights of "secured" creditors. These creditors have a security interest in some asset (such as a car or home). Examples of these types of debts are mortgages or vehicle loans. You do have the option of keeping these assets, but you generally cannot keep the collateral unless you continue to pay the debt. Chapter 7 can eliminate any duty to pay the secured creditor any more money if you choose to surrender the asset to the secured creditor.

Cannot discharge certain types of debts such as domestic support obligations derived out of a family law proceeding (child support), most student loans, restitution orders, criminal fines, certain governmental debts such as traffic tickets, and most taxes.

Most types of taxes cannot be eliminated through a Chapter 7 bankruptcy. However, certain income taxes that meet certain requirements can be discharged. An attorney will have to analyze the income taxes to determine whether they are dischargeable or not.