Chapter 7 Bankruptcy

One of the most common types of bankruptcy, Chapter 7 bankruptcy involves a liquidation of assets to pay creditors. It is generally the fastest, easiest and least expensive form of bankruptcy, but a debtor must meet strict eligibility requirements in order to qualify. Chapter 7 has the power to stop creditor contact and harassment in its tracks and will place a temporary hold on all debt collection actions against a debtor, including lawsuits, foreclosure, wage garnishment and repossession.

How Chapter 7 Works
Chapter 7 bankruptcy, often referred to as liquidation or straight bankruptcy, is usually filed for by individuals or spouses. Partnerships, corporations or other business entities may qualify for relief under Chapter 7 as well. When an individual files under Chapter 7 of the U.S. Bankruptcy Code, the bankruptcy trustee may collect any non-exempt assets and liquidate them.

After assets are liquidated, the bankruptcy trustee may distribute the proceeds to creditors. By doing this, debt is essentially eliminated, or discharged – even if the proceeds of liquidation are not enough to satisfy all creditor claims. Following the discharge, the debtor no longer has any obligation to prior creditors. If an individual does not have any assets to liquidate, and he or she files for Chapter 7 bankruptcy, debt is normally discharged within a few months.

Exempt vs. Non-Exempt Assets
Non-exempt assets are considered unnecessary day-to-day items, and may include items such as trailers or boats. Exempt assets are considered necessary items, and may include items such as cars, homes, household furniture, jewelry, pensions, unpaid/earned wages and items of clothing. The specific items which may qualify for exemption will vary depending upon the specific situation as well as state and federal bankruptcy exemptions.

Benefits of Chapter 7 Bankruptcy
There are a number of benefits associated with Chapter 7 bankruptcy. It is faster and less expensive than other forms of bankruptcy, with a discharge of all eligible debt within approximately 4 to 6 months, depending on the case. It may effectively eliminate all of a debtor's unsecured debt, leaving him or her to face a fresh financial start. It also will put an end to all debt collection actions against a debtor. Because each debtor is different, the specific advantages and disadvantages associated with filing under Chapter 7 of the Bankruptcy Code may vary.

Chapter 7 Timeline
The entire Chapter 7 process may take approximately 4 to 6 months. It begins with filing a petition with the local bankruptcy court. At this time, the bankruptcy clerk will give a notice to all creditors listed in the debtor's bankruptcy petition that they must cease all collection efforts. Approximately 21 to 40 days after the filing of the petition, the meeting of creditors will be held. Provided there are no allegations of bankruptcy fraud or creditor claims that need to be addressed, the bankruptcy court may issue a discharge order approximately 60 to 90 days after the meeting of creditors.

The Means Test
Not every debtor will qualify for relief under Chapter 7 of the Bankruptcy Code. A key part of qualifying will be passing the means test, which essentially evaluates the debtor's income to determine whether he or she has the "means" to repay creditors under a Chapter 13 bankruptcy payment plan. The debtor's overall income and disposable income may be assessed in the means test.

Chapter 7: The Cost and Consequences

It may cost approximately $299 to file for Chapter 7 bankruptcy, depending upon the specific circumstances, and the filing process may take about 4 to 6 months to complete. After an individual receives his or her bankruptcy discharge by the court, he or she will no longer have any obligation to pay the debt that has been discharged. Filing for bankruptcy will have a negative impact on a debtor's credit score, and repairing this can take several years to fix. A Chapter 7 bankruptcy filing may remain on a debtor's credit report for up to 10 years and may decrease an individual's eligibility or increase interest rates for mortgage loans, credit cards, car loans, and bank loans. With careful planning and financial management, however, a debtor may find that he or she is able to rebuild his or her credit faster.

Get the information and guidance you need – find a bankruptcy lawyerin your area.