How Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy is also known as “liquidation.” It is the most common type of bankruptcy that individuals file for, and it is much quicker and cheaper than Chapter 13.
In choosing whether to file Chapter 7 or Chapter 13, you need to review what types of debt you have. Chapter 7 is generally the best choice for people who have a lot of unsecured debts, such as credit card debt or medical bills. If you have secured debts on assets that you want to keep, such as a home, or one or more vehicles, you might be better off filing Chapter 13. In order to file Chapter 7, you must pass the Means Test. If you do not pass the Means Test, your only option may be to file Chapter 13 (or you can try to file Chapter 7 under the “Presumption of Abuse” clause, if you believe you have a case).
Most Chapter 7 cases are processed, and the discharge issued, within three to four months. Some cases may take a couple of months longer.
Following is an overview of the Chapter 7 process.
How it works
Hopefully, by the time you have determined your eligibility and made the decision to file Chapter 7 bankruptcy, you will have found a bankruptcy attorney who you feel comfortable working with. As we’ve mentioned elsewhere, many attorneys will offer you an initial consult for free. They can help you with your decision-making before you file, and they will make sure that nothing is overlooked as your case progresses.
Your attorney will work with you through the following steps. Alternatively, if you do choose not to work with a bankruptcy attorney (filing “pro se”) you can use this section to make sure that you do not miss any of the critical steps along the way.
Take a credit counseling course
The credit counseling course must be taken from an approved non-profit credit counseling agency within 180 days before you file bankruptcy. This can be done in person, by phone, or online, and it usually takes around an hour. The course consists of a one-on-one session with a credit counsellor who will ask you a lot of questions, to verify that bankruptcy is actually the best option for you. The course usually costs between $50 and $100, and you will obtain a certificate which you will need in order to file.
File your bankruptcy petition
Your attorney will help you prepare your bankruptcy petition. In most cases, the Schedules (all of the forms listing your financial information) will be filed at the same time - but you do actually have up to 15 days after the petition is filed to submit them, and up to 30 days to submit the Statement of Intention. This is the stage where you determine which property you can exempt from the bankruptcy. It’s very important that you list everything you can exempt on your Schedule C, because this is the property that you will be allowed to keep.
The moment the petition is filed, the automatic stay is imposed. Your creditors must stop contacting you, and any collection processes such as foreclosure or repossession or utility disconnection must be stopped immediately. The trustee who will oversee your case will also be appointed as soon as you file.
Notice of Filing Bankruptcy sent to all creditors
Around 15 days after you file, the court will send out a “Notice of Filing Bankruptcy” or “Notice of Commencement of Case” to all of your creditors. This notice will specify the date of your Meeting with Creditors, and will notify the creditors to indicate what their claims are against you and advise them of the deadlines if they wish to object to your case.
Submit 4002 documents
As debtor, you will be required by Rule 4002 of the Bankruptcy Code to provide certain documents. You must provide your trustee with a copy of your most recent tax return at least seven days before your Meeting with Creditors. In addition, if any of your creditors have requested a copy of your tax return by 14 days before that meeting, you must provide them with it at least seven days before the meeting. You must also bring to the meeting:
- a government-issued photo ID
- documentation or evidence of your social security number
- evidence regarding current income such as recent pay stubs
- statements for all bank accounts, investment accounts, brokerage accounts, etc.
If you cannot provide any of the documents listed above, you must provide a written statement that the documentation either is not in your possession or does not exist.
Attend your Meeting with Creditors
The Meeting with Creditors, also known as the “341 hearing” or “341 meeting,” usually takes place between three and six weeks after you file. Although, in most cases, your creditors will choose not to attend this meeting, you are required to attend it and to bring the documents listed above. If you do not attend, your case will be dismissed.
In most cases, the meeting is very short and informal. You will be required to testify under oath that the statements in your petition are truthful and adequate. The meeting is presided over by the trustee, and in most cases lasts less than fifteen minutes.
Attend your Debtor Education Briefing
The “Debtor Education Briefing” or “Financial Management Briefing” must be taken within 60 days of your Meeting with Creditors. You will not be granted your discharge until you have filed a certificate verifying that you have completed this course.
This course is often confused with the credit counseling course that you started the bankruptcy process with, but it is actually very different. It is more instructional in nature, and it teaches you how to manage your personal finances after bankruptcy. The course takes around two hours to complete, and it can be taken in person, by phone, or online.
Receive your discharge
The whole Chapter 7 process is very quick. You will receive your discharge once the 60 day period your creditors have to object to the discharge has passed, and once you have completed your Debtor Education Briefing. You will usually receive your discharge papers within two to three months after your Meeting with Creditors. This means that the debts that you had are now permanently discharged, and that your former creditors may never contact you about collecting on them. The final article in this series is dedicated to this final stage: life after bankruptcy.
Read on for our next article in this series: How Chapter 13 Bankruptcy Works