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What is bankruptcy Chapter 7?

Chapter 7 is also known as a “straight bankruptcy” or “liquidation bankruptcy” because it’s the quickest, straightest path to final discharge. You liquidate available assets and the funds are used to pay off your lenders and creditors. Any remaining balances are discharged.

How Chapter 7 works

  1. First, before your filing, you are required to complete mandatory pre-bankruptcy credit counseling within 180 days prior to the date of your filing.
  2. Once you pass, you are clear to proceed to a file a petition for bankruptcy; you will need to provide:
    1. Your credit counseling completion certificate
    2. A schedule of assets and liabilities
    3. A schedule of income and expenditures.
    4. A statement of financial affairs
    5. A schedule of executory contracts and unexpired leases
  3. You will typically meet with your assigned case trustee 15-20 days after you file.
  4. You will be subject to a means test to verify you are eligible for a Chapter 7 filing.
  5. You will also have an “automatic stay” issued on all of your financial accounts. This means:
    1. Creditors are preventing from trying to collect on any debt
    2. Any pending foreclosure process is stopped
    3. Pending lawsuits are frozen
  6. Your creditors will have the opportunity to object to discharge if they can prove fraud.
  7. You typically will receive official discharge about 60 days after your trustee meeting.

3 things to know about Chapter 7 bankruptcy

#1: You won’t lose everything

Clothes and personal property are usually not considered as assets, so they would not be liquidated. In addition, you may even be able to keep your car and home in certain situations as long as you are current with the payments. In both cases, the property must be below a certain monetary value.

#2: Certain debts stay with you

There are also certain debts that may stick with you even after you complete your bankruptcy filing. These include:

  • Child support
  • Alimony and spousal support
  • Student loan debt (federal and private)
  • Debts to government agencies for fines and penalties
  • Civil lawsuit debts for injury to another person
  • Tax debt

#3: Don’t try to game the system

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) extended the regulations surrounding personal bankruptcy. Never consider bankruptcy an “easy out” or try to use it to game the system in your favor.

  • Don’t run up debt after you’ve already filed or just prior to filing – this may mean your debt will not be discharged
  • Don’t try to move in order to make Chapter 7 easier – although bankruptcy law varies by state, federal law prohibits debtors from filing within 2 years of moving to a new state