Chapter 7 Bankruptcy
A Chapter 7 bankruptcy provides the cancellation of most debts without repayments to creditors. In a Chapter 7 bankruptcy, a court-appointed trustee examines all of the debtor’s property to determine if anything can be sold to pay creditors. In most cases, debtors are able to keep all of their property. This is because debtors can keep a certain amount of property through the use of exemptions. The trustee cannot sell belongings that are claimed as exempt.
Some of the federal exemptions, effective April 1, 2016, include:
$23,675 for equity in a residence
$3,775 for a car
$12,625 for household goods and furnishings
If a debtor has property that's worth more than the amount he's allowed to keep, the trustee may take the property and sell it to pay creditors. Liens on property are deducted from the value to determine how much the property is worth to the debtor. This is also referred to as the equity. For example, if a house is worth $100,000 and there's a $90,000 mortgage on the house, then the debtor's equity is only $10,000.
In order to file a Chapter 7 bankruptcy case, debtors must be able to show the court that cannot afford to pay their creditors. If the debtors' median household income is lower than the median income for their state, then the court presumes that they cannot afford to pay their creditors. Higher income debtors must be able to show the court that they do not have sufficient income after the payment of certain living expenses. The test used to make this determination is called the means test.
After filing a Chapter 7 bankruptcy petition with the court, debtors must attend a court proceeding called a 341 Meeting of the Creditors. The 341 hearing allows the creditors and trustee to ask debtors questions about their finances. In most cases, there are no creditors at the hearing. The trustee verifies that all of the information on the bankruptcy documents is correct and reviews the debtor's social security card and government issued picture identification.
Approximately two or three months after the 341 hearing, the debtor will receive a discharge or cancellation of his or her debt owed prior to filing bankruptcy. However, certain debts cannot be discharged in bankruptcy. These include: student loans, certain tax debts, child support, alimony, and debts resulting from certain criminal offenses. Most liens on property are not cancelled with a Chapter 7 discharge. This means that mortgages and liens on cars held by car finance companies will still exist after the bankruptcy discharge. Therefore, the creditor will still be able to reposses or foreclose on the property if the debtor stops making the mortgage or car loan payments.
The purpose of a Chapter 7 bankruptcy is to give people who are unable to pay their debt a fresh start. By keeping all or most of their property and eliminating all or most of their debts, debtors are provided with an opportunity for a fresh start. This makes Chapter 7 bankruptcy a good option for many people. However, debtors who can afford to repay some of their debt or have substantial property that can't be exempted in a Chapter 7 may be better served with a Chapter 13 bankruptcy.