Chapter 7 Bankruptcy is one of the two most common types of Bankruptcy filed by individuals (the other being Chapter 13).  The major distinction between the two is that there is no payment plan in a Chapter 7 case and a typical Chapter 7 cases only lasts about 4 months instead of 3-5 years for a Chapter 13.    Chapter 7 is sometimes referred to as “liquidation” because the Chapter 7 Trustee may liquidate, or sell, the individual’s non-exempt property to pay creditors.  In reality, very few individuals lose any property to the Chapter 7 Trustee.  Although there are benefits to a Chapter 13 case, particularly the ability to make up past due house payments, most individuals are arguably better off in a Chapter 7 case if they qualify under the Means Test.  This post is a brief overview of Chapter 7 Bankruptcy.

  1. Eligibility for  Chapter 7.   Eligibility for Chapter 7 is primarily determined by the “Means Test,” which was implemented in 2005.  The Means Test compares household income with allowed expenses, based on number of people in the household,  in order to determine if the individual (or couple) has “disposable income” to pay creditors through a Chapter 13 plan.  The Means Test is discussed in greater detail in this post.  In addition, individuals and couples are eligible for a Chapter 7 case if their business debt is greater than their consumer debt by $1 more even if they would not be eligible for Chapter 7 under the Means Test.  For example, if a person has business debt of $600,000, including personal guarantees, and $589,000 of personal debt, including their home loan, they will qualify for a Chapter 7 case even if they would otherwise have too much income under the Means Test.  One of the most important steps in the Bankruptcy process is to meet with a Bankruptcy lawyer to determine whether they qualify for Chapter 7.  In addition, as with any Bankruptcy case, the individuals must take the pre-filing counseling class, as otherwise the case will likely get dismissed.
  2. Exempt and Non-exempt Property.  Individuals filing Chapter 7 submit Schedules that show their exempt and non-exempt property.  Since they are not paying anything back to creditors in a Chapter 13 plan, the Chapter 7 Trustee will review the Schedules to determine whether any non-exempt assets may be sold to pay something to creditors.  In reality, very few people filing Chapter 7 ever lose any property at all to the Trustee.  The Trustee will not go to your house and take your furniture, clothing and other household goods unless it can be sold for thousands of dollars more than the exemptions.  In the few cases in which the Trustee does sell property in a Chapter 7 case, it is when the individuals have tens of thousands of dollars in equity in their house or have expensive boats, second homes, or jewelry.  Very few individuals in Chapter 7 have these items and if they did they have probably already sold them to pay their living expenses.  Even in Georgia, where Chapter 7 Trustees handle hundreds of cases a year, they may have less than 10 cases in which they liquidate property owned by the individuals.  It is unusual for the Trustee to even take a second look at the Schedules beyond their initial review.
  3. First Meeting of Creditors (or 341 meeting).  In all cases, a First Meeting of Creditors is held at which the Trustee will ask questions about your Schedules and your case. Normally, this is scheduled about a month after the case is filed. Occasionally, creditors may attend.  We have discussed this meeting in this post, and for most Chapter 7 clients this is the only trip they have to make to the Courthouse.
  4. Post-filing Counseling Class.  In addition to the credit counseling class required before filing the case, a second class is required in order to receive a Chapter 7 discharge.  It is important to take this class as soon as possible after the case is filed so the case is not held up.  If the counseling certificate is not filed, the case will be closed without a discharge.  While Courts are liberal in allowing a case to be re-opened to file the certificate, this adds additional expenses for filing fees and attorneys fees and can delay a discharge for several months.
  5. Chapter 7 Discharge.  Assuming the individuals have filed all necessary Schedules and other documents required to be filed, have taken the required counseling classes, have been honest in documents, and no party has objected, a Chapter 7 discharge will be entered about four months after the case is filed.  Because the goal of filing the case is to receive the discharge, it is important to make sure all of these requirements are met.  The date of the discharge is an important date, as it is what is reported in credit reports and requested in loan applications.  Good Bankruptcy lawyers will keep up with deadlines and remind their clients of these requirements.
  6. The Case is Closed.  In the majority of Chapter 7 cases, the case is closed at the same time the discharge is entered or a few days later.  This means the case is officially over.  In the unusual cases in which the Trustee is still investigating assets or liquidating property, the case will remain open until the Trustee has completed all of those duties and filed a final report with the Court.  Again, even if the case is technically open for several months or even a year more more, it is the date of discharge that is most important.  Credit reports and loan applications will not ask when the case is closed.

Obviously, this is a basic, general overview of the common Chapter 7 case.  It is important to have good legal advice at every step of the Bankruptcy process, starting with the point at which a Bankruptcy filing is a possibility.  There are steps individuals can take in the weeks and months before filing that directly affect both eligibility for a Chapter 7 case and eligibility for a discharge.  Even if an individual or couple is eligible for a Chapter 7 case, it may be more appropriate to file a Chapter 13 case.  Assets (including money and other property) must be reviewed and exemptions planned prior to filing.  Experienced Bankruptcy lawyers often save clients much more than they will pay in fees, so it is important that individuals take the time to find an experienced lawyer well before a filing is necessary.

Related Posts:  Lien Stripping in Chapter 7 Cases.