The purpose of a Chapter 7 federal bankruptcy petition is, in effect, to allow a person to obtain a fresh start from debt. After filing in bankruptcy court for relief, an individual debtor may receive a discharge of certain debts. A discharge permanently prohibits creditors from attempting to collect debts that the debtor lists on prescribed bankruptcy schedules attached to the initial petition.
Here, we'll provide an overview of the Chapter 7 bankruptcy process and discuss facets of Chapter 7 as applied to individuals only.
Where/How to File
Your Chapter 7 petition will need to be filed in the U.S. Bankruptcy Court of the federal district in which you reside. There are 90 federal districts nationally. Bankruptcy cases cannot be filed in a state court.
If you choose to file without an attorney, visit the website of the bankruptcy court in your district for the instructions and forms required for filing a Chapter 7 petition. Bankruptcy petitions filed under Chapter 7 must be accompanied by the appropriate filing fees.
Prior to Filing: The Pre-Petition Course
Before filing your petition with the court, you are required to take a pre-petition course—which can be taken online for as little as $25—to ensure that you’ve explored other credit solution options prior to making your filing. You will then need to file a certificate of credit counseling, as well as a copy of any debt repayment plan developed through credit counseling, with the court upon filing your petition.
The Bankruptcy Court's Control Over Your Financial Affairs
Once you file for bankruptcy, the bankruptcy court assumes control over your financial affairs. What this means in practical terms is that you cannot sell or convey your property once you file, or pay off pre-existing debts, without the court’s consent. Subject to a few exceptions, you may do as you wish with the property and income that you acquire after the date of your bankruptcy filing.
The Bankruptcy Trustee
The court exercises its control through a court-appointed bankruptcy trustee. The trustee’s principal role is to liquidate any of the debtor’s assets that are not exempt from liquidation in a manner that maximizes the return to the debtor's unsecured creditors.
Filing a Chapter 7 Petition
A Chapter 7 case commences with the debtor filing a petition with the bankruptcy court. Along with your petition, you will also be required to file:
- A schedule of assets and liabilities
- A statement of current income and expenditures
- All debts to be included in the bankruptcy
- Executory contracts and unexpired leases
- A schedule of exempt assets
- A so-called "means test" form, which is used by the trustee to assess possible abuse of the bankruptcy laws
- Debtors must also provide the trustee with a copy of the tax return for the most recent tax year, as well as tax returns filed during the case (including tax returns for previous years not filed at the time the case commenced)
- Social security number (although this is not disclosed to the general public), and a list all your creditors and their addresses
Individual debtors with primarily consumer debts must also file:
- Evidence of payment from employers, if any, received 60 days before filing
- A statement of monthly net income that also discusses anticipated increases in income or expenses after filing
- A record of any interest that a debtor has in an education individual retirement account or under a qualified state tuition program
Note that spouses filing under Chapter 7 are subject to the same document filing requirements as individual debtors.
In filing your petition, you will also attach several "schedules," which provide the court with detailed information about your finances. Among the schedules that an individual debtor must file is a schedule of "exempt" property, which you contend should remain your property without becoming the property of the bankruptcy estate.
Exceptions to the general rule that your assets and property become the bankruptcy estate's property typically depend, in part, on the laws in your individual state. In certain states, you are required to apply that state's exemptions in lieu of federal exemptions, whereas other states allow you to choose between the state and federal exemptions. A homestead exemption may apply in your state, which could allow you to keep all the equity in your home.
Filing a Chapter 7 petition automatically stays most collection actions against a Chapter 7 debtor. The stay arises out of operation of law, and requires no judicial action. The court, through its clerk, supplies notice of the pending bankruptcy case to all creditors whose names and addresses the debtor provides.
The Creditors’ Meeting
Between 21 and 40 days after the petition is filed, the trustee will hold a meeting of creditors. The individual filing debtor has to attend this meeting, but bankruptcy judges are prohibited from attending the meeting of creditors. The trustee conducts the meeting and, after swearing you in, may pose questions about the petition just filed. The trustee is required by law to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy, such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt.
Within 10 days of the creditors' meeting, the trustee will report to the court whether grounds exist to presume the case to be an abuse of the bankruptcy process by applying "means testing" and assessing the debtor's income.
Conclusion of the Chapter 7 Bankruptcy Process
Although obtaining a discharge is a goal of the process for filers under Chapter 7, it is not the final step in the bankruptcy process. Immediately prior to obtaining a discharge, petitioners are required to take a post-petition counseling course. This course is taken immediately prior to your bankruptcy being discharged, with the goal of providing counseling regarding how better to manage money and debt obligations in the future. This course, like the pre-petition course, can also be taken online for as little as $25.
Typically, unless a creditor or other party files a complaint objecting to a discharge or a motion to extend the time to object, the bankruptcy court will issue the discharge order 60 to 90 days after the first meeting of creditors.
After the discharge, your case is not over until the court enters a final decree. In the final decree itself, the court has the prerogative to prescribe continuing responsibilities depending on the facts and circumstances of your case.
Debtors should be aware that there are several alternatives to Chapter 7 bankruptcy. For example, individual debtors with regular income may seek an adjustment of debts under Chapter 13 of Title 11 of the U.S. Bankruptcy Code.
The above information is not legal advice and is not a guide for filing for bankruptcy. It provides general information about the Chapter 7 bankruptcy process. There is no substitute for reference to Title 11 of the U.S. Code, as well as the Federal Rules of Bankruptcy Procedure.