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Chapter 7 Bankruptcy Process

By Graham Billings on January 27, 2010

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Chapter 7 bankruptcy is the process by which you liquidate some of your personal assets in order to repay creditors. It differs from Chapter 13 bankruptcy in that instead of re-paying creditors with a wage over time, you will quickly repay your debts by selling property. The entire Chapter 7 bankruptcy process is quicker and easier, but it may have drastic effects on your way of life; the following article will detail the process and help you decide whether Chapter 7 bankruptcy is right for you.

The first thing you must do is see if you qualify for Chapter 7 bankruptcy. There is a means test for bankruptcy, which is in place so that debtors with a high income cannot avoid their debts by filing for Chapter 7 bankruptcy, liquidating their assets, and then buying new assets with their high wage. Chapter 7 bankruptcy is designed as a final option for debtors who must pay off their creditors, and therefore is only meant for a limited group of people. The means test will help you determine whether you can file for Chapter 7 bankruptcy and if it is right for you.

If you qualify by the means test, there is still one other obstacle to filing for Chapter 7. You will not be able to file for Chapter 7 if you have already completed a bankruptcy filing within the past 6 to 8 years, depending on the type of bankruptcy you filed.

If you qualify for Chapter 7 and have decided it is the right thing for you, then the actual process of filing is relatively simple. It usually takes around six months and only requires one trip to the courthouse after you file your forms. The entire process costs $299 in administrative fees. The forms you must file include a petition for bankruptcy, a description of your property, income, expenses, and debts, a listing of the property you are “claiming,” and your property transactions within the past two years. You may “claim” property that you want to keep, with certain restrictions. Usually, under the law you may keep things that are essential to continuing to live a fruitful life – equity in your home, clothing, cars, and so on. There is a list of what – and how much – you are allowed to claim. In addition, you must complete credit counseling with an agency approved by the United States Trustee. The US Trustee’s website has a listing of approved counselors by state.

After you have filed your paperwork, the Chapter 7 bankruptcy process will begin. The court puts its power in a trustee, who will examine your filed forms and your assets to make sure everything is in line. The trustee will do everything he or she can in order to free up as much money to repay creditors. Once the trustee has determined that your papers are in order, they will schedule a meeting with you and your creditors at the courthouse to make sure everyone is informed throughout the process.

In effect, filing for bankruptcy relinquishes your control over your personal property and gives it to the bankruptcy court. The court will determine a plan through which it may use your unclaimed assets to repay your creditors, so you are not allowed to sell your property – or make any other transactions on it – without the court’s consent. If the trustee has examined your property and determined something is not valuable enough to sell, then he or she may give it back to you, even if it is unclaimed. As a result, in most Chapter 7 cases, debtors surrender very little property, since they can claim their real estate and car and nothing else is valuable enough for the trustee to sell. As long as you stay up to date on your payments on your protected property after bankruptcy, then you may not have to surrender any of your personal property at all.

Once the process is completed, almost all your debts are discharged. The only debts that remain are those on law-mandated processes like child support, crime-related debts like fraud repayment, student loans, and income tax payments. You must continue to pay off these debts in order to stay in good standing.

One of the best things about bankruptcy filings is the automatic stay it places on creditors. Immediately after you file for bankruptcy, the court places a stay – a declaration that creditors may no longer contact you in order to attempt to reclaim their money. Throughout the process, as long as you abide by the court’s plan, no creditor will be able to contact you. If you fall behind on your payments after the bankruptcy process has been completed, the creditor may ask the court to have the stay lifted, but as long as you manage your payments after the filing then they will have no reason to contact you.

Although this article has provided an overview of the Chapter 7 bankruptcy process, that may not mean that it is best for you. If your primary debt comes from the kind that cannot be discharged, filing for Chapter 7 may not do you much good. Similarly, if all of your income is protected – like social security payments – and all your private property is claimable, then you may as well not file for Chapter 7, as there is nothing creditors can currently take from you. If you have a lot of property and not very much debt, then what you will give up may not be worth it to file. The best thing you can do is look at your own income, expenses, property, and debt, and try to figure out what is best for you, as no one is in the same situation. Additionally, it may pay off for you to hire an attorney to help. Altogether, Chapter 7 bankruptcy can be beneficial for getting you out of a bad situation with hopefully minimal losses.

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