WHAT IS CHAPTER 7?
Chapter 7 is the most common form of bankruptcy, often referred to as “Straight Bankruptcy.” Its goal is to provide the people filing Chapter 7 (called “debtors”) a “fresh start.”
Although Chapter 7 cases are called “liquidations,” in the vast majority of them nothing is taken from the debtors. That is because the law protects certain categories of assets, called “exemptions,” from the creditors. In every Chapter 7 bankruptcy proceeding, a trustee is appointed, whose role is to administer the bankruptcy case. The trustee determines whether everything the debtors own is exempt. However, if there are debtors’ assets which are not exempt, trustee will claim and then sell them and pay the proceeds to the creditors.
The filing of the bankruptcy creates an immediate injunction, or “stay,” which stops most kinds of actions by a creditor to collect a debt. This “automatic stay” prohibits almost all creditors from calling the debtor, sending collection letters or bills, repossessing collateral such as an automobile, continuing with a mortgage foreclosure, or otherwise attempting to pursue a debt. The bankruptcy court can for certain reasons terminate the automatic stay, or “get relief from the stay,” to allow a secured creditor to enforce its rights against the collateral.
TIMELINE FOR CHAPTER 7
For most individuals, a Chapter 7 case takes about three to four months. Before filing the bankruptcy, the debtor must complete a simple credit counseling course. Then the bankruptcy case is started with the debtor, through his or her attorney, filing his “petition” and other paperwork at the bankruptcy court. The debtor’s attorney also provides the assigned Chapter 7 trustee with certain other financial documents. A short official meeting–called the “341 hearing” or “meeting of creditors”–is held with the trustee about a month after the bankruptcy filing, which the debtor must attend and answer questions under oath. The case is then held open for a period of 60 days after that meeting, during which time creditors or an agency called the U.S. Trustee may challenge the debtor’s “discharge” (legal write-off of the debts) or attempt to get the case dismissed. These challenges happen in relatively few cases. If there are no such challenges, and no property to be administered, the discharge is granted and the case closed very shortly thereafter, often even on the same day. Before that happens, the debtor must take a qualified debtor financial education course and provide verification of having done so.
This process can take much longer if someone challenges the debtor’s right to a discharge or attempts to dismiss the case. Or if the Chapter 7 trustee decides to collect non-exempt assets, the case is kept open while the trustee collects and liquidates the assets, and then distributes the proceeds to the creditors.
In most Chapter 7 cases, personal debtors are discharged from their debts. But there are some exceptions–certain debts are not subject to discharge. For example, student loans are rarely discharged, and domestic support obligations are not discharged. Nor are criminal fines or restitution. Some income taxes are not discharged, but some can be. There are other types of debts which are not subject to discharge, so you should discuss the nature of your debts with an attorney. Most common debts such as credit card debts, medical bills, collection accounts, etc. will be discharged.
If the debtor has committed certain bad acts, such as hiding assets, or lying on his bankruptcy schedules or during a bankruptcy hearing, he can be denied a discharge. But denial of discharge in bankruptcy is rare. In most cases, the trustee has no assets to collect and distribute, there are no challenges to discharge, and the case is successfully completed less than four months from its filing.