What Are the Steps in a Chapter 7 Bankruptcy?

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There are different types of bankruptcy, one of which is called chapter 7. With a chapter 7 bankruptcy, you eliminate unsecured debts, and it’s also known as liquidation bankruptcy. 

This option may be available to you if you can’t keep up with your living expenses, but there are downsides, including the reality you may have to sell your possessions and it will impact your credit for a long time into the future. 

There are a number of steps in a chapter 7 bankruptcy, including the meeting of the creditors.

Below, some of these steps are detailed. 

The Basics of Chapter 7 Bankruptcy

Chapter 7 bankruptcy, when you file, puts an automatic stay on your current debts. This means the court is preventing creditors from foreclosing on your home, collecting payments, garnishing your wages, or turning off your utilities. 

At that point, the court takes legal possession of your property, and you’re appointed a bankruptcy trustee who will handle your case. 

The trustee is responsible for going over your assets and finances. They will sell the property that your bankruptcy won’t allow you to keep, which is known as nonexempt property. They will then use the proceeds to repay creditors. 

The trustee is responsible for arranging a meeting that occurs between you and your creditors, known as the meeting of the creditors, which was mentioned above. 

The property that’s exempt and how much you can exempt depends on your state. The majority of chapter 7 cases are no-asset. That means that all of your property is exempt or there’s a lien against the property. 

What Happens After You File?

If you qualify for chapter 7 and you can keep certain exempt property, then you file a bankruptcy petition. 

You submit the paperwork with the court, and you include details of your finances, including your income and debt, property and more. 

You may need to go back as far as 10 years. You then need to include a certificate of completion. This indicates you took credit counseling from an agency that’s approved, within the past six months. 

Then, once you file your petition, the automatic stay is put into place. 

Around five days before the meeting of creditors, you send documents to your trustee that show the statements you made in your paperwork are true and correct. 

You then attend the meeting of creditors, and from there, you do a financial management course. The court at that point should issue a discharge of the bankruptcy. 

That means the automatic stay will end, and the discharge doesn’t indicate which of the debts will be eliminated. 

Instead, it shows the debt that remains. 

The court then closes the case unless there’s ongoing litigation. 

Who Qualifies?

Not everyone can file for chapter 7 bankruptcy, and if you have a high income and you could instead pay your debt through chapter 13, you probably won’t qualify. 

You have to pass the bankruptcy means test, which looks at your income. 

The test will compare your monthly income versus the median income of other families of the size of yours in your state. 

You can’t file if you have a previous discharge within the past eight years. You also can’t file if you had a chapter 13 discharge in the past six years. 

How Long Does the Process Take?

The chapter 7 bankruptcy process, starting with the initial credit counseling you have to do and going through to when your debts are discharged, takes anywhere from four to six months for most people. 

Your case might take longer, though. 

The chapter 7 bankruptcy can stay on your credit for up to 10 years starting at your filing date. A chapter 13 bankruptcy only remains on your credit report for up to seven years after you file. 

Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 as was mentioned, is known as liquidation bankruptcy. You may have to sell some of your property to pay debts, and it’s the option most often used if you don’t own a home and you have limited income. 

Chapter 13 is also called a reorganization bankruptcy. 

You can keep your property, such as your home and car, but you have to complete a repayment plan outlined the court, which takes anywhere from three to five years. 

Both individuals and businesses can file chapter 7, while only individuals can file chapter 13.