OVERVIEW OF CHAPTER 7 BANKRUPTCY

By definition, bankruptcy is a term used to describe a legal proceeding whereby a debtor declares his/her inability to pay their debts as agreed.  Under bankruptcy terminology, a debtor is someone who owes money and a creditor is a person or company to whom money is owed.  A Chapter 7 bankruptcy allows for the discharge of certain debts in exchange for liquidating the debtor’s assets, if applicable, as determined by the court-appointed trustee assigned to the case.  Each state has it’s own exemption laws, which permit the debtor(s) to keep certain real and/or personal property. 

Also known as a ‘fresh start,’ a Chapter 7 bankruptcy permits a debtor to discharge almost all of his/her unsecured debts.  It’s important to note that secured debts, such as a mortgage, auto loan or other loan secured by collateral, must either be repaid or relinquished in a bankruptcy proceeding.  Consumers who wish to keep their home or car must continue paying the loan as agreed.  Depending on each individual state, a debtor may be asked to sign a reaffirmation agreement, which will reaffirm the debt as though the bankruptcy never occurred.  Although the lender can ask that this agreement be signed, not every debtor is legally obligated to sign unless required by state law.  In some states, the continuance of timely payments is enough to protect the asset from repossession or foreclosure. 

Under Chapter 7 bankruptcy laws, there are debts that can be discharged and those that cannot.  Unsecured debts, such as credit cards and personal loans, can be discharged in most cases.  Secured debts can also be discharged, but the debtor is required to continue paying if they wish to keep the property.  Debts that cannot be discharged include child support, alimony, student loans, court-ordered restitution, most taxes, judgements stemming from personal injury to another person or property as a result of negligence or intention and debts that were incurred by fraud. 

A Chapter 7 bankruptcy begins with a full disclosure of all debts, income and both real and personal property on a bankruptcy petition to be filed with the court.  The debtor(s) will then be given a notice to attend a 341 meeting, also known as a ‘Meeting of Creditors,’ which will involve the court-appointed trustee asking the debtor a series of questions regarding their petition.  This interview is recorded and typically takes place at a courthouse.  Unless one or more creditors file an objection or the court requires more information, this is most likely the only meeting that the debtor will attend. 

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was introduced as a way to make it more difficult for consumers to seek protection under a Chapter 7 bankruptcy case.  The new law calls for a credit counseling prerequisite and strict guidelines that will force more consumers into a Chapter 13 bankruptcy, which involves a court-ordered repayment plan.   

The information contained in this article is designed to be used for reference purposes only.  It should not be use as, in place of or in conjunction with professional legal or financial advice.  For additional information relating to the filing of bankruptcy, consult a local attorney who specializes in bankruptcy law.