When considering personal bankruptcy, Chapter 7 is the one that most debtors choose. In filing for bankruptcy, debtors are able to gain relief from creditors, get their lives in order and eventually reestablish their credit. Read through this list of Frequently Asked Questions to start to understand how Chapter 7 works and if it may be a good choice for you.

• 1) What is Chapter 7 Bankruptcy?

This type of bankruptcy is for individuals who have either little to no equity or a modest amount of equity and require relief from debt. Under Chapter 7, petitioners are allowed to discharge major portions of their debt, while partially paying off some of it and retaining some of their equity.

• 2) For whom is Chapter 7 designed?

This type of bankruptcy was created for debtors who can in no way pay off their creditors and who possess either a modest amount or little to no equity.

• 3) Who may file under Chapter 7?

Any person, who satisfies the means test or who is below the median income for the district in which they reside may file for Chapter 7. Anyone who resides in, does business in, or has property in the United States may file under Chapter 7, unless they have been involved in another bankruptcy case that was dismissed within the last 180 days or had a Chapter 7 case discharged in the last eight years.

• 4) What is the means test?

The “means test” basically determines if a debtor is able to repay their debt through a Chapter 13 payment schedule. If a debtor can meet their financial obligations under Chapter 13, then they cannot file for Chapter 7 unless their income is below the median for the district in which they live.

• 5) Must the petitioner seek credit counseling?

Yes, in order to file for bankruptcy, the petitioner must undergo credit counseling from a company that has been approved by the United States Trustee's office. Such counseling agencies may charge for their services, but they must either reduce their rate or waive their fee if a debtor cannot afford to pay.

• 6) Where does one file a Chapter 7 petition?

A petition is filed by the debtor in the bankruptcy court, which is a unit of the federal district court, of the district in which he/she has lived for the better part of the last 180 days.

• 7) Why should one file for Chapter 7?

• •   You Qualify for Chapter 7: If a debtor qualifies for Chapter 7 that usually means that’s the best way to go. With Chapter 7 in four to six months, a petitioner can settle with creditors and start fresh.

• •   You’re Unable to Payback your Debt: Chapter 7 is a relatively quick way foe debtors to get their life in order by freeing themselves from harassing collection calls, growing debt and crushing pressures.

• •   You Want to Protect Your Homestead: With Chapter 7 as long as you stay current on mortgage payments, you’re allowed to keep the home in which you live. There are certain limitations in terms of how much equity is protected. If you missed mortgage payments, Chapter 7 does not prevent the lender from foreclosing.

• •   You Want to Protect Other Limited Assets: Other assets may also be protected under Chapter 7, including to a certain extend your automobile, business assets, personal property, retirement and pension plans, public assistance and jewelry. There are limits on many of these items.

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  8) Can a husband and wife file jointly under Chapter 7?

A husband and wife may file a joint petition under Chapter 7. In filing a joint petition, only one set of bankruptcy forms is needed and one filing fee is charged.

• 9) When should a husband and wife file jointly under Chapter 7?

If both spouses are liable for a major portion of dischargeable debts owed, then both husband and wife should file. If only one files and the other spouse is liable, then creditors will attempt to and may collect the debt from the spouse who has not filed.  

• 10) What’s the basic difference between Chapter 7 and Chapter 13?

Chapter 7 is for those who are unable to payback their debts. Under Chapter 7, a substantial amount of debt will be discharged and debtors can often keep their home, vehicle, business assets and other items. Chapter 13 is for debtors who are able, over three to five years, to pay back a major part of their debt.

• 11) May a Chapter 13 case be converted to a Chapter 7?

Yes, this may occur if the Chapter 13 filer, due to unforeseen circumstances, such as illness, injury or loss of job, is unable to meet the payments in their payment plan. The court trustee may then allow the petitioner to convert to a Chapter 7 bankruptcy where most if not all of their debt will be discharged.

• 12) How does Chapter 7 work?

A petitioner files with the court and includes in the petition a list of all their creditors and what they owe. Also included is a list of their assets, income, latest tax return and monthly expenses. The petitioner must also claim one of two sets of exemptions that will allow them to protect certain assets. The trustee will issue a stay to all creditors.

In 20 to 40 days, the trustee will oversee a meeting with the debtor and his/her creditors. In this meeting, the documents are examined and the debtor questioned in terms the viability of their Chapter 7 claim. Within 10 days, the trustee will determine if the debtor qualifies for Chapter 7. In 99% of the cases, the bankruptcy is granted.

If granted, the discharge of debts usually occurs with the next 60 to 90 days. If not granted, the petitioner will be instructed to file for Chapter 13.

• 13) How much does it cost to file?

It costs $299 to file for Chapter 7 with the court.

• 14) What’s an automatic stay?

Once someone petitions the court for bankruptcy, the trustee contacts all creditors listed on the petition and orders an automatic stay on all debt collection procedures. During the bankruptcy process, all creditors must cease all attempts to collect money owed to them.

• 15) Does the automatic stay not cover some debts?

The stay does not cover some debts. Debts such as back child support and alimony may still be collected. Two other types of actions that are unaffected by the stay are IRS tax liens and criminal proceedings that may involve debt or restitution.

• 16) Will I see a judge?

It’s rare for a petitioner to see a judge. Instead, the court will appoint a trustee who will oversee the case. The case will go before a judge if creditors contest it and the trustee is unable to settle the complaints.

• 17) What is a bankruptcy trustee?

The trustee is a court appointed agent who oversees bankruptcy cases through each and every phase. They will review paperwork, contact creditors, meet with debtor and creditors and determine if the debtor’s Chapter 7 petition is viable. They also handle all payments to creditors and the discharge of all debts. They administer the case until it is closed.

• 18) What are exemptions?

Under Chapter 7, various assets are exempt from a creditor’s collection efforts, such as certain amounts of equity in your home, vehicle and business. Debtors are allowed to keep these items and various belongings as long as they meet certain conditions.

Those filing for Chapter 7 Bankruptcy may use one of two lists of exemptions: either those found under Code of Civil Procedure 703.140 (CCP 703) or those that are contained in Code of Civil Procedure 704 (CCP 704).

• 19) Do people who file for Chapter 7 lose their homes?

As long as one keeps up on monthly payments and meets certain exemption limits, a debtor can keep their home.

• 20) Do people who file for Chapter 7 lose their vehicles?

As long as one keeps up on monthly payments and meets certain exemption limits, a debtor can keep their vehicle.

• 21) What’s covered under CCP 703?

CCP 703 is for debtors who have little to no equity. It also has a special Wild Card protection that is not available under CCP 704.  Here’s a partial list of exempt items covered under CCP 703.

•  •  Real Property/Homestead- up to $20,725
•  •  Wild Card Protection for Any Property
•  •  Motor Vehicle
•  •  Tools of the Trade
•  •  Various Personal and Household Possessions
•  •  Jewelry
•  •  Pension and Retirement Plans
•  •  Bank Accounts

 

• 22) What’s covered under CCP 704?

The amount of home equity protected under CCP 704 ranges from $75,000 to $175,000 (depending upon certain conditions regarding your status). Remember, under CCP 704, there is no Wild Card exemption. Here’s a basic list of exemptions:

•  •  Homestead
•  •  Material for Repair or Maintenance of Homestead
•  •  Motor Vehicle
•  •  Tools of the Trade
•  •  Various Personal and Household Possessions
•  •  Jewelry, Heirloom and Art
•  •  Pension and Retirement Plans
•  •  Insurance and Public Benefits

 

23) What debts are not exempt under Chapter 7?
There are certain debts that are not exempt under Chapter 7. These include:

•  •  Debts not listed in the petition.
•  •  Debts associated with divorce, including alimony, child support and maintenance.
•  •  Debts or restitution connected to any criminal activity in which the debtor has been involved.
•  •  Any new debts incurred while the plan was in effect.
•  •  Any loan on which you are not current such as a mortgage or car loan.
•  •  Certain student loans or education debts.
•  •  Certain back taxes owed.

 

• 24) When must a petitioner appear in court?

Usually, the petitioner must appear in court once. They go to court for the 341 meeting with the trustee and creditors, which usually occurs about 20 to 40 days after the initial filing of the petition.

• 25) What is the 341 meeting and how does it work?

This is a meeting where the trustee determines if the debtor has been truthful regarding his/her assets, debts and other financial facts. The two primary participants in the meeting are the trustee and debtor. Creditors are invited to attend. They may or may not.

This is basically a fact-finding meeting where the debtor, under oath, is asked questions regarding their income and debt. The meeting, which is tape-recorded by the court, generally lasted 15 to 30 minutes.

• 26) What is required for the court to approve a Chapter 7 plan?

The petitioner must file all paperwork and have an income below the median level in the district in which they live or they must meet the means test in terms of being unable to pay back their creditors.

• 27) What if the court does not approve a Chapter 7 plan?

If the petitioner is found to be able to payback their debt, they will be denied Chapter 7 and instructed to file for Chapter 13.

• 28) How long does the Chapter 7 process take?

From filing to discharge of debts the process takes about four to six months.

• 29) Are cosigned or guaranteed debts treated differently than other debts?

Yes. Only the person who files for and is granted Chapter 7 bankruptcy is no longer liable for debts but cosigners and guarantors are. Thus, creditors can collect the debt from those who cosigned or guaranteed the debt.

• 30) What happens to the non-exempt property that the debtor turns over to the trustee?

In most cases the property is sold and converted into cash that is then used to pay expenses and fees of the trustee and the claims of unsecured creditors.

• 31) What happens if the debtor has no non-exempt property that the trustee can use to liquidate and settle claims?

About 50% of the Chapter 7 petitioners hold no assets. When this occurs, the trustee will inform all creditors that there are no assets to be liquidated and there is no need for them to file claims. The court also informs creditors that in the event assets are later discovered that they will be contacted and allowed to file claims.

• 32) What is Chapter 7 discharge?

The final phase of the Chapter 7 process is the discharge of debts. Under the guidance of the trustee after non-exempt property is liquidated and used to pay off creditors, all other qualified debts are discharged, which means that creditors may no longer attempt to collect them.

• 33) How does a debtor know that debts have been discharged?

Usually the court sends a notice of discharge to the debtor and all creditors.

• 34) Will the trustee contact my employer?

They will need to contact your employer to confirm your salary as listed on your bankruptcy petition.

• 35) Does filing for Chapter 13 affect my credit rating?

Initially, it will harm one’s credit rating but once debts are discharged and you remain debt free, your credit score will rise. However, it will take years to see your good credit restored.

Most people who are considering filing for bankruptcy can benefit from talking to a bankruptcy attorney. If you have questions or concerns regarding Chapter 7 or bankruptcy in general, then please contact our office at (888)540-3720.