What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy offers a fresh start for those who can no longer keep up with their debt. Another term for Chapter 7 is a liquidation bankruptcy. Businesses and individuals have the right to file under the Bankruptcy Code a petition under Chapter 7. Many unsecured debts may be erased, and it is meant to reset the finances within the household.

There are different chapters to file, but this is the most common for individuals and businesses. There are various qualifications to meet and certain items the bankruptcy will not touch. If you feel you fall in a category that puts you looking into different options, contact an attorney who handles bankruptcy to see if Chapter 7 is right for you.

Valuable Information on Filing Chapter 7

Chapter 7 is different from Chapter 13. Chapter 7, in many cases, does not require the individual or business to pay back certain debts. The way it works is the trustee will collect and sell non-exempt assets and put the proceeds toward the creditors. Everything follows the Bankruptcy Code provisions. Sometimes properties or mortgages will be placed as liens to the creditors. In other words, an estate is formed, and the value pays off the debts. In some situations, the debtor may keep some items or property.

It depends on the value if it is worth putting up. Each state sets its price limits. If the debtor keeps any of the property, it is called exempt property. There is a chance that the debtor may lose the property under Chapter 7, but the debt will be paid off.

The Lifecycle of Chapter 7

It can take up to six months to file Chapter 7. Once the petition is filed under the Bankruptcy Code, it stops all creditors from contacting the debtor for any collections. This step is called an automatic stay. There shall be no phone calls, letters in the mail, or any continuing litigations. If any creditor on the bankruptcy schedule breaches the code, they are incomplete violations and subject to penalties.

Afterward, a trustee is appointed to take over the case. A meeting will take place early in the stages. This meeting is called a “Section 341 Meeting.” It is also known as the meeting of creditors. However, this term is often misinterpreted because there are no creditors present. 

The trustee will inquire about the bankruptcy petition in the Section 341 Meeting. All financial affairs, statements, and schedules are discussed. Documents are drawn up stating the debtor’s financial status, assets, liabilities, and the petition date. It also contains any transfers over the previous year and 90 days, along with causes of action against the debtor. Any disputes the debtor has claimed against the other parties are also documented.

The Section 341 meeting will continue until the trustee has complete knowledge of the debtor’s assets, both exempt and non-exempt. The trustee may request any further information, and any sign of fraudulent activity or withholding information will end the petition immediately.

When the investigation ends on the debtor’s estate, it will be known if the debtor has enough assets to hand out to the creditors or not. At the end of the Section 341 meeting, if the debtor has no assets, a “report of no distribution” will be issued by the trustee. 

This report is given to all the creditors, and the debts will be discharged. If there are non-exempt assets, the trustee distributes them pro-rata to the unsecured debt. It will pay off the debt as collateral and pay the attorney, trustee, and professional fees. 

A final report is given to the court at the end of the case, and a judge will close it. A “discharge injunction” will then occur, and no creditor can make a single effort to contact the debtor from that point on for any discharged debt.

Beware of Objections from Creditors

The bad news is if a creditor challenges the discharge, they have up to 60 days to do so. In most cases, they will not contest the judge’s ruling. However, if one of the following has been done before the debtor filed bankruptcy, they have the right to go after the debtor in court.

  • Purchasing luxury products right before filing
  • Taking out a cash advance right before filing
  • Incurring debts through fraud
  • Using a credit card to pay off a non-dischargeable debt 
  • Committed fraud or perjury in the bankruptcy case

No matter what; ALWAYS be honest when filing Chapter 7.

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