Chapter 7 Bankruptcy

In Brief

Chapter 7 is for those who want a "fresh start." When you file Chapter 7, you keep all property which the law assumes is needed for a "fresh start" (called "exempt" property which includes reasonable clothing, furniture, cars, homes and certain other property), and you surrender any non-exempt property to the trustee as part of the bankruptcy estate. For most debtors, all property is exempt and is therefore retained.

In Depth

Sometimes referred to as the "fresh start," "liquidation," or "straight" bankruptcy (meaning that there are no "plans" being proposed), a Chapter 7 filing, like all bankruptcies, initiates the "automatic stay" which prevents creditors from taking any action to collect a debt from you without adhering to strict federal parameters. They can't call you, they can't write you, they can't sue you and can't continue to sue you if they have already started a lawsuit.

Individuals (including married couples filing together) and business entities which are not performing, such as corporations, LLCs and partnerships, may utilize Chapter 7.

The "fresh start" begins on the day the petition is filed; not later when the Debtor meets the trustee or after that when the Debtor receives a discharge. So, with limited exceptions, what you own and what you owe on the day you file is what matters.

The bankruptcy process also explores certain historical records to be sure the Debtor is "playing fair" in getting the discharge from having to pay debts. The year or two prior to the filing of the bankruptcy petition is given close scrutiny to ensure that property was not disposed of without obtaining fair value and that payments to certain creditors were not outside of acceptable limits. None of this necessarily means that the Debtor cannot obtain the discharge being sought, however.

A trustee is appointed to administer the case and the Debtor must attend a "First Meeting of Creditors" as part of the process. Often, this is the only direct personal contact with the system other than meetings with your lawyer and his staff.

In most Chapter 7 cases, the Debtor does not give up any assets, and he or she discharges most if not all debts, and the entire process often takes as little as four to five months. Even so, the Debtor's active participation in the typical "no asset" case (where there is no non-exempt property for the trustee to take to pay creditors) can often be over from the first 60 days or so after the filing of the petition.

Sometime the process of obtaining a discharge may involve surrendering property to the trustee for the benefit of the bankruptcy "estate," meaning a fund from which the creditors might be paid all or a portion of what they are owed. Invariably, however, this is far less than the amount of debt that the Debtor is discharging.

A person who receives a discharge in bankruptcy in Chapter 7 is precluded from receiving another discharge in a Chapter 7 if the subsequent Chapter 7 petition is filed within eight (8) years of the first one. If the subsequent petition is filed in Chapter 13, the time period is four (4) years.

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