Chapter 7 bankruptcy refers to the chapter of the federal statutes (the Bankruptcy Code) that contains the bankruptcy law. Chapter 7 bankruptcy is sometimes called "straight" bankruptcy. This bankruptcy cancels most of your debts; in exchange, you might have to surrender some of your property. The whole Chapter 7 bankruptcy process, in a basic, uncomplicated case, takes about four to six months, involves about $300 in filing and administrative fees, and commonly requires only one trip to the courthouse.
To file for bankruptcy, you fill out a two-page petition and several other forms. Then you file the petition and forms with the bankruptcy court in your area. You also have to file your tax returns, and undergo financial counseling. Then, you need to meet a financial means test. Basically, the petition and forms ask you to describe:
- your property
- your current income and its sources
- your current monthly living expenses
- your debts
- property you claim the law allows you to keep through the bankruptcy process (exempt property -- most states let you keep clothing, household furnishings, Social Security payments you haven't spent, and other basic items) Although bankruptcy law and bankruptcy courts are federal, the exemptions are governed by the states and thus vary from state to state
- property you owned and money you spent during the previous two years, and
- property you sold or gave away during the previous two years.
Both you and your attorney must attest that all the information submitted is true and accurate.
Filing for bankruptcy puts into effect something called the "automatic stay." The automatic stay immediately stops your creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab (garnish) your wages, empty your bank account, go after your car, house or other property, or cut off your utility service or welfare benefits.
Until your bankruptcy case ends, your financial problems are in the hands of the bankruptcy court. It assumes legal control of the property you own (except your exempt property, which is yours to keep) and the debts you owe as of the date you file. Nothing can be sold or paid without the court's consent. You have control, however, with a few exceptions, of property and income you acquire after you file for bankruptcy.
The court exercises its control through a court-appointed person called a "bankruptcy trustee." The trustee is mostly interested in what you own and what property you claim as exempt. This is because the trustee's primary duty is to see that your creditors are paid as much as possible on what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid.
The trustee goes through the papers you file and asks you questions at a short hearing, called the "creditors' meeting," which you must attend. This meeting is not likely to last more than five minutes. Creditors may attend, too, but rarely do.
After this meeting, the trustee collects the property that can be taken from you (your nonexempt property) to be sold to pay your creditors. You can surrender the property to the trustee, pay the trustee its fair market value or, if the trustee agrees, swap some exempt property of equal value for the nonexempt property. If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee can "abandon" the property - which means that you get to keep it. Very few people actually lose property in bankruptcy.
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 motor vehicles. In most cases, you'll have to either surrender the collateral to the creditor or make arrangements to pay for it during or after bankruptcy. If a creditor has recorded a lien against your property, that debt is also secured. You may be able to wipe out the lien in bankruptcy.
If, after you file for bankruptcy, you change your mind, you can ask the court to dismiss your case. As a general rule, a court will dismiss a Chapter 7 bankruptcy case as long as the dismissal won't harm the creditors. Usually, you can file again if you want to, although you may have to wait 180 days.
At the end of the bankruptcy process, most of your debts are wiped out (discharged) by the court. You no longer legally owe your creditors. But you can't file for Chapter 7 bankruptcy again for another eight years from the date of your filing.
Form: Hiring An Attorney For Adversary Bankruptcy Proceedings
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Hiring an Attorney for Adversary Bankruptcy Proceedings
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Copyright © 2002 Nolo
This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.