A Chapter 7 bankruptcy is the most common type of a bankruptcy case. It is often called a liquidation bankruptcy because non-exempt (not-protected) assets could be sold to pay creditors. Yet, in the majority of Chapter 7 bankruptcy cases, this does not occur and no assets are actually sold. Usually, the value of the average Chapter 7 bankruptcy filer’s assets does not exceed the allowed exemption amounts (amounts protected in a bankruptcy filing). What does this mean? It means that most people that file Chapter 7 bankruptcy cases get to keep all of their stuff, while getting rid of a lot of debt. Of course, there are limitations and exclusions regarding specific types of debt that a person can get rid of in bankruptcy, such as student loans and certain taxes.
Prior to filing for relief under Chapter 7, you must make sure that you qualify. Your bankruptcy attorney will review your financial situation and evaluate your income through certain guidelines, called the Means Test. Step one of the Means Test requires an analysis of your annual household income to determine if you are under or over the income requirement for your household size. If your income is under the Means Test guidelines, then you qualify for Chapter 7. If your income is over the guidelines, the analysis would proceed to step two, where your household budget would be evaluated to determine if there is any excess money left, after you pay all your necessary household expenses, such as food, shelter, utilities, insurance and other necessities. If there is little to no money leftover in your budget, then you can file for Chapter 7.
Once it is determined that you qualify for Chapter 7, you will be required to provide your bankruptcy attorney with numerous documents evidencing your income and assets. Your attorney will review your documentation and prepare your petition. After your petition is filed with the Bankruptcy Court, you will be scheduled to appear at a mandatory meeting, called a First Meeting of Creditors (also called a 341A Meeting). Although the meeting is called a First Meeting of Creditors, it is rare for a creditor to appear. You are required to attend this meeting or your case will be dismissed. At the meeting, you will be questioned by the Chapter 7 Trustee that was assigned to administer your case. It is the Chapter 7 Trustee’s job to review your petition and to evaluate your case. The Chapter 7 Trustee will gather and review documentation that is necessary to determine if your case was properly filed and if there are any assets that could be sold for the benefit of your creditors. You must cooperate with the efforts of the Chapter 7 Trustee and provide all requested documentation.
After the First Meeting of Creditors is conducted, there is a deadline set for creditors, or other interested parties, to object to your bankruptcy discharge (the discharge is the order from the Bankruptcy Court that directs that you are no longer legally obligated to pay your debts). That deadline is set for 60 days after the meeting. If a creditor has reason to believe that you have engaged in any wrongdoing (fraud, misrepresentation, deceptive practice…) it must file a complaint to deny you your discharge, with the Bankruptcy Court, by that 60-day deadline. Once that deadline passes, creditors lose their right to file such a complaint against you. Although in the majority of Chapter 7 cases creditors do not file any complaints, allowing the creditors the 60-day window of time is a required by the United State Bankruptcy laws.
After the deadline has passed for creditors to object to your case and once the Chapter 7 Trustee has determined that there are no assets that can be sold, the Bankruptcy Court will proceed to finish up your case. As soon as the Bankruptcy Court has received the required documentation from the Chapter 7 Trustee, it will issue your Discharge Order and officially close your case. The average Chapter 7 case lasts approximately 4-5 months.