Bankruptcy is a legal proceeding that relieves a debtor of all or some of the debts the owe. Chapter 7 bankruptcy, known as liquidation, liquidates your eligible assets and uses the proceeds to pay back your creditors. After any eligible assets have been liquidated and creditors have been paid, you would typically be discharged of all other consumer debts. After the bankruptcy discharge, you would no longer be legally responsible for repaying the debt. Not only that, a creditor could not collect the discharged debt from you.
Chapter 7 Means Test
The U.S. government recently passed a law to make sure consumers who could actually afford to repay their debts did not abuse the bankruptcy system. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) requires a means test for all Chapter 7 bankruptcy filers who make more than the median income in their state. Find out your state's median income from the U.S. Census Bureau.
If you make more than your state's median income and your average monthly disposable income over the next 5 years is more than $100, then you fail the means test and would not be able to file Chapter 7 bankruptcy. Your case would either be dismissed or converted to a Chapter 13 bankruptcy case.
Information Required to File Chapter 7 Bankruptcy
Your Chapter 7 bankruptcy case starts when you file a bankruptcy petition with your local bankruptcy court. When you file your bankruptcy petition, you'll also have to include certain forms:
- A schedule of assets and liabilities. This lists all your creditors and the nature of the debt claims they've made.
- A statement of current income and liabilities. You must include your source of income, amount, and frequency along with your monthly living expenses.
- A statement of financial affairs. This form asks questions about your income for the past three years, debts you owe, repossessions, foreclosures, etc.
- A schedule of executory contracts and unexpired leases. These are contracts and leases that you have not yet fulfilled, e.g. a lease on your apartment.
If you have mostly consumer debt (vs. business debt), you must also file a certificate of credit counseling along with a copy of the debt repayment plan (if there is one) put together by the credit counseling agency. You must have received credit counseling from an approved credit counseling agency within the 180 days preceding your bankruptcy filing.
How Much Does Chapter 7 Bankruptcy Cost
Filing Chapter 7 bankruptcy costs a total of $309 - a $245 filing gee, a $39 miscellaneous administrative fee, and a $25 trustee surcharge. If you hire an attorney to file bankruptcy you may have other costs.
Bankruptcy filing fees are due to the clerk of court when you file your bankruptcy petition. You may get permission to make a maximum of 4 periodic payments with the final payment due no more than 120 days after you file. You may be able to have the bankruptcy fee dismissed if you make less than 150% of the poverty level and you can't afford to pay the fee at all, not even in installments. However, if the fee is due and you don't pay it on time, your bankruptcy case will be dismissed.
After You File
Once you file bankruptcy, a trustee will be assigned to your case. Or, if you live an Alabama or North Carolina a member of the bankruptcy court will do the job of the trustee. The trustee will first review your assets and determine whether they are exempt or nonexempt. Nonexempt assets will be sold and the proceeds will be used to pay your creditors. Exempt assets, on the other hand, remain yours.
If the trustee determines that all your assets are exempt, then he'll file a "no asset" report with the court. Most Chapter 7 bankruptcy cases are no asset cases.
If your case has nonexempt assets, your creditors are allowed to file a claim for distribution. They have 90 days after the first date set for the meeting of the creditors to file their claims. If you have any government creditors, they have 180 days to file their claim.
Between 20 and 40 days after you file bankruptcy, a meeting of the creditors will be held. You're required to attend this meeting where creditors and the trustee will ask questions about your finances and assets. If you're filing with a spouse, both you and your spouse must attend the meeting.
Chapter 7 Bankruptcy Discharge
A Chapter 7 bankruptcy is typically discharged four months after the petition was filed. Discharge papers will automatically be mailed to your creditors letting them know that the debt has been discharged and they cannot collect on it anymore.
A Chapter 7 bankruptcy filing will remain on your credit report for up to 10 years. You cannot file another Chapter 7 bankruptcy for 8 years or Chapter 13 bankruptcy for 4 years.