What is a chapter 7 bankruptcy case and how does it work?
A chapter 7 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 7 of the Bankruptcy Code. Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is a federal law that deals with bankruptcy. A person who files a chapter 7 case is called a debtor. In a chapter 7 case, the debtor must turn his or her nonexempt property, if any exists, over to a trustee, who then converts the property to cash and pays the debtor’s creditors. In return, the debtor receives a chapter 7 discharge, if he or she pays the filing fee, is eligible for the discharge, and obeys the orders and rules of the bankruptcy court.
What is a chapter 7 discharge?
It is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is a debt that the debtor is released from and does not have to pay.
How does a person obtain a chapter 7 discharge?
A chapter 7 discharge is obtained by filing and maintaining a chapter 7 bankruptcy case and being eligible for a chapter 7 discharge. However, not all debts are discharged by a chapter 7 discharge. Certain types of debts are by law not dischargeable under chapter 7 and debts of this type will not be discharged even if the debtor receives a chapter 7 discharge.
Who is permitted to file and maintain a chapter 7 case?
Any person who resides in, does business in, or has property in the United States is permitted to file a chapter 7 bankruptcy case except a person who has intentionally dismissed a prior bankruptcy case within the last 180 days. To be permitted to maintain a chapter 7 bankruptcy case a person must qualify for chapter 7 relief under a process called means-testing.
What is means testing?
Means testing is a method of determining a person’s eligibility to maintain a chapter 7 case. Under means testing a person whose current monthly income from all sources multiplied by 12 exceeds the median annual income, as reported by the U.S. Census Bureau, for the person’s state and family size, must show that he or she is not able to pay a minimum of $117.08 per month for 60 months to his or her unsecured creditors from his or her disposable monthly income in order to be eligible to maintain a chapter 7 case. Disposable monthly income is a person’s current monthly income from all sources less the person’s permitted current monthly expenses. The chapter 7 case of a person whose disposable monthly income is such that he or she is deemed to be able to pay $117.08 per month or more to unsecured creditors for 60 months will be dismissed or converted to chapter 13 unless special circumstances exist.
May a husband and wife file jointly under chapter 7?
Yes. A husband and wife may file a joint case under chapter 7. If a joint chapter 7 case is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. However, both husband and wife must receive the required credit counseling before the case is filed and both must complete the required financial management course after the case is filed.
Under what circumstances should a joint chapter 7 case be filed?
A husband and wife should file a joint chapter 7 case if both of them are liable for one or more significant dischargeable debts. If both spouses are liable for a substantial debt and only one spouse files under chapter 7, the creditor may later attempt to collect the debt from the nonfiling spouse, even if he or she has no income or assets. In community property states it may not be necessary for both spouses to file if all substantial dischargeable debts are community debts. the community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.
How does the filing of a chapter 7 case by a person affect collection and other legal proceedings that have been filed against that person in other courts?
The filing of a chapter 7 case by a person automatically suspends virtually all collection and other legal proceedings pending against that person. A few days after a chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the person. This court-ordered suspension of creditor activity against the person filing is called the automatic stay. If necessary, notice of the automatic stay may be served on a creditor earlier by the person or the person’s attorney. Criminal proceedings and actions to collect domestic support obligations from exempt property or property acquired by the person after the chapter 7 case was filed are not affected by the automatic stay. The automatic stay also does not protect cosigners and guarantors of the person filing, and a creditor may continue to collect debts from those persons after the case is filed. Persons who have had a prior bankruptcy case dismissed within the past year may be denied the protection of the automatic stay.
How does filing a chapter 7 case affect a person’s credit rating?
It will usually worsen it, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under chapter 7, apparently because it will be at least 8 years before they can file another chapter 7 case. If there are compelling reasons for filing a chapter 7 case that are not within the person’s control (such as an illness or an injury), some credit rating agencies may take that into account in rating the person’s credit after filing.
Does a person lose any legal or civil rights by filing a chapter 7 case?
No. Filing a chapter 7 case is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
May employers or governmental agencies discriminate against persons who file chapter 7 cases?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed a chapter 7 case. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to the granting of licenses (including a driver’s license), permits, student loans, and similar grants because that person has filed a chapter 7 case.
Will a person lose all of his or her property if he or she files a chapter 7 case?
Usually not. Certain property is exempt and may not be taken by creditors unless it is encumbered by a valid mortgage or lien. A person is usually allowed to retain his or her unencumbered exempt property in a chapter 7 case. A person may also be allowed to retain certain encumbered exempt property. Encumbered property is property against which a creditor has a valid lien, mortgage or other security interest.
What is exempt property?
Exempt property is property that is protected by law from the claims of creditors. However, if exempt property has been pledged to secure a debt or is otherwise encumbered by a valid lien or mortgage, the lien or mortgage holder may claim the exempt property by foreclosing upon or otherwise enforcing the creditor’s lien or mortgage. In bankruptcy cases property may be exempt under either state or federal law. exempt property typically includes all or a portion of a person’s unpaid wages, home equity, household furniture, and personal effects. Your attorney can inform you as to the property that is exempt in your case.
When must a person appear in court in a chapter 7 case and what happens there?
The first court appearance is for a hearing called the “meeting of creditors,” which is usually held about a month after the case is filed. The person filing the case must bring photo identification, his or her social security card, his or her most recent pay stub and all of his or her bank and investment account statements to this hearing. At this hearing the person is put under oath and questioned about his or her debts, assets, income and expenses by the trustee. In most chapter 7 consumer cases no creditors appear in court; but any creditor that does appear is usually allowed to question the person. For most persons this will be the only court appearance, but if the bankruptcy court decides not to grant the person a discharge or if the person wishes to reaffirm a debt, there may be another hearing about three months later which the person will have to attend. Your attorney will attend all of these hearings with you.
How is a person notified when his or her discharge has been granted?
The person is usually notified by mail. Most courts send a form called “Discharge of Debtor” to the person filing and to all creditors. This form is a copy of the court order discharging the person from his or her dischargeable debts, and it serves as notice that the discharge has been granted and that creditors are forbidden from attempting to collect discharged debts. It is usually mailed about four months after a chapter 7 case is filed.
How long does a chapter 7 case last?
A successful chapter 7 case begins with the filing of the bankruptcy forms and ends with the closing of the case by the court. If there are no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the person filing receives his or her discharge, which is usually about four months after the case is filed. If there are nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his or her other duties in the case. Most chapter 7 consumer cases with assets last about six months, but some last considerably longer.
How does a chapter 7 discharge affect the liability of cosigners and other parties who may be liable to a creditor on a discharged debt?
A chapter 7 discharge releases only the person or persons who filed the chapter 7 case. the liability of any other party on a debt is not affected by a chapter 7 discharge. therefore, a person who has cosigned or guaranteed a debt for the person filing is still liable for the debt even if the person filing receives a chapter 7 discharge with respect to the debt. the only exception to this rule is in community property states where the spouse of the person filing is released from certain community debts by the chapter 7 discharge. Illinois is NOT a community property state.
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