Chapter 7 is the “liquidation chapter.” It is literally based upon a chapter in a book. The 7th chapter of the United States Bankruptcy Code. It is a federal remedy for people and companies who cannot repay their debt. It is the quickest and simplest way to file bankruptcy.
It is an extremely efficient process for persons who cannot repay their debt. In the span of about four months after filing a Chapter 7 petition with the court, debtors’ cases are usually fully administered, they received their discharge order so they don’t have to pay their debts any more, and the case closes. Typically no property is sold for creditors and the discharge order starts debtors on the road to financial recovery and even improving their credit score.
The basic bargain of Chapter 7 Bankruptcy is that if you really are insolvent, that is to say don’t make too much money or have assets that are more or less typical of middle class folks, then you should be able to get rid of debt you cannot afford to repay. You demonstrate the inability to pay in the documents you file with the court. This allows you and your creditors to go your own way without having to pretend that the debt will be repaid. You are unburdened of having to pay and the creditors can concentrate their efforts on collecting from those who can pay.
For example, often people can only afford to make the minimum payment on their credit cards, but that doesn’t ever pay off the debt, and about a third of the interest gets piled back onto the principal. If all they can afford to pay is the minimum, that debt will never be paid off. It is like running on a hamster wheel that is rolling backwards.
If you qualify for Chapter 7 and your attorney advises you it the best chapter for you, then it works like this:
You accurately list everything you own (your “assets”) along with everything you owe (your “liabilities”) To protect your assets your attorney helps you choose which “exemptions” are right for you. Exemptions are state law protections that are treated in depth in another section of this website.
You also figure out your income and expenses as defined in Chapter 7. You fill out a few more forms that detail your “financial affairs” and once that is done completely and you’ve considered all the timing implications of starting your case, and you’ve completed your credit counseling, you file these documents with the U.S. Bankruptcy Court.
The Court then sets the “Meeting of Creditors” also known as the 341A hearing. That’s where the Chapter 7 Trustee examines you for basically one reason only: To find out if there are any assets that are “non-exempt” (unprotected) that can be sold to pay your creditors at least some of the money they are owed. About 99% of cases are “no-asset” cases, (more accurately called “no-distribution” cases these days) and you usually only need to go to one of these meetings. You wait around with other debtors waiting to be examined for an hour or so, and then spend just a few minutes being examined yourself. You will have an opportunity to watch other examinations so you can see how it is done prior to your examination.
The 341A hearing is an administrative hearing. The Trustee is not a judge. It is not a test. You just need to show up.
Once the Trustee concludes his or her examination, then you just go home and sometime in the next 45 days you need to do an online Financial Management Course. This takes about 2 hours of your time, and we set you up with one that is worth viewing.
Depending on your circumstances, you may have some additional matters to deal with after the hearing such as dealing with secured collateral. More often there is nothing more to do than wait.
Then you receive your Chapter 7 discharge order and your creditors are permanently kept from trying to collect the debts they had against you. Then the case closes and you live your life with a fresh start from dischargeable debts.