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Chapter 7

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a commonly filed bankruptcy by individuals whose income is below a certain level that differs from state to state. To qualify, you have to pass a “means test” that indicates your income is low enough to qualify for Chapter 7. The income used is the last six months’ of gross income received, so if a debtor has recently become unemployed and has not found new employment yet, it is easier to qualify under the means test.

Chapter 7 is commonly called a “fresh start” because it allows a debtor to discharge all of the debtor’s debts, without losing most assets, and without making monthly payments to a bankruptcy trustee. Certain assets (homes, cars, possessions, etc.) are “exempt” up to a certain amount. Exempt assets cannot be taken by the bankruptcy trustee to pay a debtor’s debts, but non-exempt assets can be seized and sold to pay those debts. Non-exempt assets can be “redeemed” (bought back) by the debtor in lieu of the debtor losing the asset. Each state has different amounts for which assets are exempt, so it makes sense to consult with an attorney long before filing for Chapter 7 bankruptcy protection, in an effort to “bankruptcy plan”. An attorney who is familiar with all of the different chapters of bankruptcy, as well as debt settlement, would be most effective in deciding if Chapter 7 is the right fit. As debt settlement attorneys, McCarthy Law looks at each individual debtor’s case to decide if bankruptcy or debt settlement would be more effective in that individual case.

About a month or two after a Chapter 7 bankruptcy is filed, the debtor is required to attend a Section 341 hearing (named after the section of the bankruptcy code in which it is found). This is commonly called a Meeting of Creditors, even though creditors rarely attend these meetings. At the Section 341 hearing, the bankruptcy trustee (who is appointed by the bankruptcy court) will examine the debtor as to their various assets, in an effort to determine if any assets are exempt, to be used to pay the various creditors on a pro rata basis. If no exempt assets are found, then the trustee files a Report of No Distribution, and the case generally is closed shortly thereafter.

Usually, a debtor receives a Discharge of Debt 60 to 90 days after the Section 341 hearing, even if the trustee has not made a determination as to whether the debtor has any non-exempt assets. Certain debts (child support, spousal maintenance, most student loans, and tax and other governmental obligations) are not dischargeable in bankruptcy, so it is necessary for a debtor to examine the types of debts to be discharged in determining if Chapter 7 is the right way to go.