January 20, 2011

Chapter 7 Bankruptcy Basics

Posted in Bankruptcy tagged at 12:40 pm by demetriagraves

One of the most common questions I get asked regarding bankruptcy is – How difficult is it to file? So here’s some bankruptcy basics that will help give you a clearer picture of what is involved in filing for bankruptcy. Chapter 7 bankruptcy, otherwise known as “liquidation,” is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A court appointed trustee gathers and sells your non-exempt property and uses the proceeds from the sale to pay your creditors.”Exempt property” is property that a debtor is allowed to keep. For example, your personal possessions are considered exempt. What property is exempt is determined by state law. It is always best to check with an attorney in your state to see what exemptions apply to your individual case.

Most chapter 7 cases are “no-asset” cases, which simply means that you do not have any non-exempt property for the trustee to sell. At the time that you file your petition for bankruptcy, you declare whether your case is “asset” or “no-asset” and the burden is on the trustee to change the designation.You do need to be eligible for Chapter 7 and you must undergo a “means test” to qualify for Chapter 7 bankruptcy. The “means test” is how the Internal Revenue Service will determine who can or cannot file for Chapter 7. Your income and expenses are examined in detail to see how they compare to the standard for your area as set by the IRS. If you earn less than the median income for a family of your size in your state, you can automatically file for Chapter 7 bankruptcy. You must also receive approved credit counseling and a budget analysis.

A bankruptcy starts with the filing of the official petition, schedules and Statement of Financial Affairs with the bankruptcy court. In order to complete the Bankruptcy Forms, you must provide a list of all of your creditors and the amount and type of their claim; the source, amount, and the frequency of your income; a list of all of your property; and a detailed list of your monthly living expenses.

As soon as you file for bankruptcy, your creditors are prevented from trying to collect on your debts through what’s called an “automatic stay.” The stay is designed to preserve your property and to give you a break from litigation. A creditor must show the bankruptcy judge, after a hearing, that there is “cause” for the creditor to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy period).

If there is property that isn’t exempt, the trustee takes control of it. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims. Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.

Usually between 20 and 40 days after you file your petition, the trustee will hold the “first meeting of creditors”. You must be present for that meeting. The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do. Generally, the only responsibilities you have with respect to the bankruptcy after the meeting of creditors is to cooperate with the trustee in providing any requested information. Creditors have 60 days after that meeting to convince the bankruptcy court you shouldn’t be allowed to jettison your debts.

Creditors may also approach you about what’s called “reaffirmation” of debts. Reaffirmation is an agreement between you and a creditor that you will remain liable on a debt and will pay the remaining portion of the amount owed in order to keep certain property, such as an automobile, even though the debt could be discharged.

If you have further questions regarding filing for bankruptcy, I offer a free 30 minute telephone consultation where you can get all your questions answered.

 

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