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Chapter 7

Many people considering filing bankruptcy want to know what is Chapter 7 bankruptcy. Chapter 7 is the most common type of bankruptcy  filed in the United States. Chapter 7 refers to the chapter of the Bankruptcy Code which can be found in Title 11 of the United States Code. Chapter 7, commonly known as liquidation bankruptcy, involves the sale of a debtor’s non-exempt assets by a trustee. Any proceeds obtained by the bankruptcy trustee are then turned over to creditors.   Generally speaking, most individuals do not have assets that the trustee will sell in Chapter 7, but this determination can only be made after speaking with an attorney.

Means Test

A debtor must successfully pass the means test calculation, which is a document that must be completed prior to filing for bankruptcy. This test, which was added to the Bankruptcy Code in 2005, calculates whether you are able to afford, or have the “means” to pay your debts. The means test annualizes your income for the past six months and compares it with the median income for your place of residence. The means test also includes your secured debt in determining whether you can afford to pay for your debts. If you fail to pass the means test, you can only file Chapter 7 bankruptcy under very specialized exceptions.

Meeting of Creditors

After a Chapter 7 bankruptcy is filed, the court will issue a document giving notice of a debtor’s Meeting of Creditors. This notice is also sent to all of the creditors that are listed within the bankruptcy documents. During the Meeting of Creditors, the bankruptcy trustee will ask the debtor various questions about the bankruptcy, such as whether all of the information contained within the bankruptcy documents are true and correct. The trustee may ask other questions about a debtor’s financial affairs. If the trustee wishes to investigate the bankruptcy further, he may continue your Meeting of Creditors to a future date. On the other hand, the trustee may conclude the meeting on the first meeting. It is important to note that at the Meeting of Creditors, as the name suggests, any creditor may appear and ask a debtor questions about his bankruptcy and finances, but this is exceedingly rare.

Seizure of Assets

If you have any non-exempt property, the bankruptcy trustee has the ability to seize and sell the property. Exemptions refer to federal or state statutes which allow a debtor to keep certain types of property from seizure in bankruptcy or to satisfy a judgment. For example, exemptions exist to protect retirement accounts, such as a 401(k) plan and, in Virginia, a debtor may claim a $6,000.00 exemption in a motor vehicle.

Discharge

If the trustee, nor any creditor objects to the debtor’s discharge, the bankruptcy court will give the debtor a discharge at some point after the last day to object. The last day to file a complaint objecting to a debtor’s discharge is 60 days after the first session of the Meeting of Creditors. If no complaint is filed, the discharge is usually entered several days later. The discharge prevents creditors from attempting to collect any debt against the debtor, personally, that arose prior to the filing of the bankruptcy. Thus, for all intents and purposes, the discharge effectively wipes out debts. However, it is important to note that not all debts are dischargeable, including, but not limited to certain taxes and child or spousal support obligations.  Furthermore, a bankruptcy discharge is personal. This means that a creditor can still collect on a discharged debt from a co-debtor that did not file for bankruptcy.

To speak with an attorney now about your financial circumstances and whether Chapter 7 makes sense for you, call (914) 483-7769 or email our firm.

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