Filing Chapter 7 bankruptcy allows people overburdened by debt to get rid of some or all of it and have a fresh start. A person appointed by the bankruptcy court, called a “Trustee,” oversees each case. This article will discuss the Chapter 7 bankruptcy process and let you know what to expect in most cases.
To get started, you need to consult a local bankruptcy attorney who can assess your situation and determine the best route to proceed. It is possible to file by yourself, without the help of a bankruptcy attorney; however, because this is one of the most complex and confusing areas of the law, the vast majority of people end up retaining an attorney to make the process go faster and ensure they don’t hit any snags along the way. Note that you won’t be able to file if you have filed bankruptcy in the past 6–8 years, depending on the type of bankruptcy you filed.
The attorney will ask you for all of your financial documentation and proof of income in order to fill out the bankruptcy application. It is VERY important to be as truthful and forthcoming as possible about your situation with your attorney. Oftentimes, people think there are certain possessions they own that will be taken away if the trustee finds out about them. However, there are many exceptions that apply to your personal property that will prevent the Trustee from taking your possessions away.
If you are open with your attorney, they can make sure that these exceptions are applied to you and protect you and your property. The only danger that can occur is if you try to hide information from the court, which is a federal offense.
Before your attorney files your bankruptcy, you will have to complete a credit counseling course sometime within 180 days prior to filing. This usually takes about an hour and a half to two hours to finish and may be completed online or by phone. The credit counseling agency will discuss your financial situation with you and assess whether Chapter 7 makes sense for you.
Ask your attorney to recommend a couple of agencies to you. Often, the associated fee will only be about $30–$50 for the course. If you cannot afford the fee, the agency will be required to waive the fee or provide the course to you at a reduced rate. Once you are done, the agency will provide you with a certification that you have completed the course and that Chapter 7 appears to be a good option for you. Your attorney will need to include this certification with your bankruptcy application.
Filing Chapter 7 bankruptcy is a relatively quick and clean process in comparison to Chapter 13 bankruptcy. Both ultimately are designed to get rid of enough of your debt to get you back on your feet; however there are many differences between how the two go about accomplishing that.
First of all, Chapter 13 is more expensive. Whereas Chapter 7 usually costs $300–$500, Chapter 13 bankruptcy usually costs anywhere from $1,500–$5,000 depending on your location. This is because Chapter 13 bankruptcy is much more complex and takes much longer to complete, often lasting around 5 years from the time you file, compared to 4–6 months for Chapter 7.
The bad news is that you don’t exactly get to pick which chapter to file—that depends on how much debt you have compared to your amount of disposable income (i.e. the amount of money you have left over each month after paying for all “necessary” expenses according to the court).
The good news is that both types of bankruptcy have something called the "automatic stay" that goes into effect immediately upon filing. The automatic stay lets you stop paying certain debts and, more importantly, prevents creditors from pursuing any more debt collection activities until after the bankruptcy process is over. This means no more harassing phone calls or obnoxious people knocking on your door. With any luck, all your debt will be discharged in the bankruptcy and you will never have to hear from your creditors again!
After you have officially filed bankruptcy you will have to attend something called the Meeting of the Creditors. Don’t let the name fool you! Creditors hardly ever show up to these meetings and they typically take place outside of a formal courtroom. Usually it is just the Trustee asking you straightforward questions to make sure that you didn’t intentionally hide anything on your bankruptcy application.
If something is missing from your application, your attorney will have the chance to amend it, which typically only takes a few days.
Now, if you have any property pledged as collateral on a loan, that loan is considered a “secured debt.” Basically, the collateral “secures” that the lender will be repaid in the event that you are unable to afford to make payments and go into default on the loan. Typically, your home and car loans will be your only secured debts.
If you are behind on your payments when you file bankruptcy the court may allow your creditor to foreclose on the loan and repossess the collateral. However, as long as you are brought current on the secured debts before filing bankruptcy, the court will most likely let you keep your property and continue to make payments.
Assuming there are no issues with your application and everything goes smoothly, you will receive word after 4–6 months that your debt has all been discharged and you are done. In the meantime, you will have to complete another credit counseling course that teaches you how to avoid getting overburdened by debt again in the future.
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