When the word “bankruptcy” comes to mind, people often think of “Chapter 7” personal bankruptcy because it is the most common. Under this type of bankruptcy, most of a person’s debts are discharged. However, the person who files for bankruptcy may have to give up certain assets.
How to File for Chapter 7 Bankruptcy Relief
There were certain amendments to the bankruptcy laws that came into force in October 2005, consisting of a two-part test. This will determine if a person even qualifies for Chapter 7 bankruptcy.
1: Determines the Repayment Capacity – The debtor’s income is examined under a certain formula, which exempts specific necessary expenses, such as rent and food, to see if the debtor can repay 25% of the “non-priority unsecured debt”.
2. Income Compared to State Median Income: The debtor’s salary is compared to the median income statewide.
If the debtor earns more than the state median income and finds that the individual can pay 25% of the “non-priority unsecured debt”, the debtor will NOT be eligible for Chapter 7 bankruptcy and will have to consider filing for Chapter 13 Bankruptcy.
The debtor must also have a meeting with a credit counselor sometime 6 months before filing for bankruptcy. He or she must also attend money management classes and must pay for them out of pocket.
the automatic stay
Once the debtor has filed for bankruptcy, the debtor’s estate is protected by the “automatic stay.” This means that debtors cannot attempt to collect debts without first having permission from the bankruptcy court. Therefore, the debtor does not have to worry about foreclosure on their home, repossession of their car, eviction from an apartment, garnishment of wages or bank accounts, power outage, or any other action creditors may take. try to take to recover any money owed.
Although the suspension may prevent the debtor from being evicted from his apartment, the new obligations incurred by the debtor would be due to his creditors. For example, if a debtor continues to rent an apartment, if they fail to pay the accrued rent AFTER the date they filed for bankruptcy, then they can be evicted from the apartment.
The Chapter 7 Bankruptcy Process
A trustee is usually appointed by the court in a Chapter 7 bankruptcy case. The trustee’s main duty is to make sure that your creditors receive as much of the amount they are owed as possible. The more of your assets the trustee can get for your creditors, the more the trustee gets paid.
There will be a short hearing called a “creditors’ meeting” that the debtor must attend, but creditors usually do not show up at the hearing. The trustee questions the debtor about his assets and liabilities. This hearing usually lasts about five minutes.
After the trustee has exhausted the debtor’s funds obtained by liquidating his non-exempt property, most of the remaining unsecured debts are discharged.
In total, Chapter 7 bankruptcy takes four to six months to finalize.