- Unlike Chapter 13, a chapter 7 bankruptcy case does not necessitate filing a plan to repay creditors. The trustee who is assigned the case is responsible for making an assessment of the debtor's non-exempt assets. The property is then sold and the proceeds are distributed to creditors pursuant to the bankruptcy laws. In some cases, the debtor's property may have been used as collateral for mortgages or other encumbrances. The proceeds from property used as collateral may go to those creditors.
- The Chapter 7 federal rules for bankruptcy determine who is eligible to file a Chapter 7 bankruptcy. Among the criteria: the individual or business must be located within the United States; they cannot have had a Chapter 7 discharge within the past six years; the completion of a Chapter 13 reorganization plan within the pass is not permitted; they cannot have had a bankruptcy filing dismissed within the past 180 days; it must not be considered a "substantial abuse" of Chapter 7 if the debtor is granted relief; it is not basically unfair to grant the debtor relief from the debts; and the debtor is required to complete a credit counseling session within 180 days before filing their petition.
- The process for filing Chapter 7 cases commences with the petition that the debtor must file in federal bankruptcy court. The case must be filed in the court that has jurisdiction over the area where the debtor resides or has their place of business. Besides filing a petition, debtors must also file additional documents, including schedules of assets, a schedule of income and liabilities, a statement of financial affairs, and any executed contracts and unexpired leases. The debtor must also include statements of any income received over a specific time period, as well as copies or transcripts of the recent tax year filed with the IRS and any tax return filed for previous tax years since the petition for bankruptcy protection was filed.
In addition, debtors must compile a list of all creditors and the type of their claims; the source and frequency of their own income; a list of property owned by the debtor and a comprehensive list of living expenses. This list would include items, such as food, clothing, transportation, medicine and other expenses.
The case is then assigned to a bankruptcy trustee. Typically, the debtor and his attorney are required to meet with the trustee 30 to 40 days after filing the petition. This meeting is called the "341 meeting" or a "meeting of creditors." The trustee will ask the debtor questions about their financial situation both past and current. Creditors of the debtor are allowed to attend this meeting, but most do not. - Once the debtor has filed for bankruptcy, he or she is granted an "automatic stay." Chapter 7 federal rules state that creditors are no longer permitted to continue collection actions against the debtor or property owned by the debtor. Generally, the automatic stay remains in effect for a specific period and prohibits the creditors from commencing lawsuits, initiating wage garnishments or even calling the debtor to seek payment. The debtor's creditors are informed of the bankruptcy by notices that are sent to them by the bankruptcy clerk
- The bankruptcy trustee in a Chapter 7 asset case has the primary responsibility of liquidating the debtor's non-exempt property. The liquidation must be conducted in a manner that will yield the most proceeds for unsecured creditors. The trustee usually sells the debtor's nonexempt property that is free of liens, as well as any property that has a value exceeding the lien holders' security interest in the asset, or the debtor's exemption. Many times the trustee must recover property transferred by the debtor within a certain time period before the petition filing. This includes fraudulent conveyances, distributions or movement of assets made by the debtor.
- Generally, the process ends with the release of debtors from personal liability from a majority of their debts. Creditors are prohibited from taking any action to collect on the debts. There are numerous exceptions under Chapter 7 federal rules; however, most individuals receive a discharge within 60 to 90 days after the 341 meeting. Usually in cases where discharge is denied, the debtor may have committed perjury; fraudulently concealed or transferred property; failed to cooperate with the trustee; or failed to follow a court order.
- Filing for bankruptcy will have a substantial affects on your financial situation for a number of years. Although an attorney is not required to file a bankruptcy case, individuals or business owners who are considering bankruptcy should seek professional legal advice prior to pursuing this recourse.