Chapter 7 Bankruptcy

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Chapter 7 bankruptcy is sometimes called straight bankruptcy or liquidation. Individuals are allowed to keep certain property classified as exempt. Usually this includes your home, an automobile for work purposes, personal belongings such as clothes and a small amount of money. Everything else is sold, especially items of value such as jewels, furs, collections, art, etc. Money from the sale of these items is applied toward your debt. Once this is done your debt is totally forgiven, except for some things like student loans, child support and tax liens.

Bankruptcy code provides alternatives to Chapter 7. There are some circumstances when the debtor may apply for an adjustment to their debts. If their home is in danger of being foreclosed they can request time to catch up on past due payments. Also, the 2005 changes gave the court authority to dismiss a plea for bankruptcy by an individual whose debts are primarily consumer rather than business debts. If the debtor’s current monthly income is more that the state median income, bankruptcy code requires they pass a “means test”. If the debtor exceeds the total amount of debt the court determines is reasonable their plea could be denied or changed to a Chapter 13.

To file for Chapter 7 bankruptcy the debtor must file a petition with the bankruptcy court. The petition includes a list of all asses owned, all debts owed and a list of all creditors and their addresses. They have to provide proof of credit counseling, income and any other documents the court requires. There are filing fees, administrative fees and trustee charges. An attorney is not required but recommended. Their fees can be high. In complicated situations their advice is invaluable. The court appoints a trustee to make sure all the bankruptcy requirements are met.

Once a petition has been filed, notices are sent to all creditors. They have the opportunity to respond. A hearing is scheduled with debtor, trustee and creditors. The debtor is placed under oath and must answer any questions pertaining to their debt. Within ten days of the hearing, the trustee reports to the bankruptcy judge the results of the meeting. The judge then decides if Chapter 7 is justified, if it should be dismissed or if it should be converted to a Chapter 13.

If the bankruptcy judge approves a Chapter 7 an automatic estate is created. Everything the creditor owns is now controlled by the trustee and the court. The trustee liquidates assets and sells personal property of the debtor. Debts are broken down by six classes. The class determines where the debt is placed on the repayment schedule. The trustee uses the proceeds to pay creditors. If all the debts are paid the bankruptcy is dismissed. It still shows as a bankruptcy on your credit report. If the proceeds are not sufficient to pay all debts, those left unpaid are included in the bankruptcy.

The final step in bankruptcy is the discharge. The judge can refuse to approve the discharge, which voids the bankruptcy, if the debtor committed fraud, did not keep good records, disposed of property to avoid sale by trustee, failed to complete financial management course, etc. In some situations a debtor might decide to continue making payments rather than include the debt in the bankruptcy. When this happens they need to reaffirm the debt. Once the final amount due on all debts is figured and any desired debts are reaffirmed, the bankruptcy judge issues a final discharge.

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