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Chapter 7

Before filing under Chapter 7, one should know there are alternatives to that kind of bankruptcy. For instance, debtors who are businesses i.e. corporations, partnerships or sole proprietors may want to retain their business and should consider filing a petition under Chapter 11, which allows reorganizing their debts in a certain manner. Sole proprietors, as well as individuals with regular income, may also be eligible for relief under Chapter 13 of the Bankruptcy Code that provides an adjustment of debts. Actually a Chapter 7 case maybe dismissed, if court finds that individual is capable of proposing and executing a workable and meaningful chapter 13 plan.

Potential debtor should realize that a filing under chapter 7 bankruptcy often result is loss of property, whereas a bankruptcy trustee will collect and sale all nonexempt property and distribute the proceeds among the creditors according to the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. In addition, under chapter 7, the individual debtor is permitted to retain certain “exempt” property. Federal law defines what property is subject to exempt, besides each state may adopt its own exemption law in place of federal law.

A chapter 7 case starts with filing a petition with bankruptcy court serving the area where the individual lives or where the business debtor has its principal place of business. A pack of schedules and statements covering debtor's financial affairs and property is filed along with the petition. The debtor is also required to pay fees (total of about $200) to proceed the case, and failure to pay these fees results in dismissal of the bankruptcy case.

Filing of the petition under chapter 7 triggers so called “automatic stay”, which prohibits creditors from any actions intended to collect debts from the debtor, including lawsuits, wage garnishments, or even telephone calls demanding payments. 20 to 40 days after the petition is filed, a “meeting of creditors is held”. The debtor must attend this meeting where creditors may question him about his financial affairs and property. At the meeting, the trustee must orally examine the debtor to make sure he understand all the potential sequences of seeking a discharge in bankruptcy, including the effect on credit history, the ability to file a petition under a different chapter, etc.

Once the petition is file an impartial case trustee is appointed by the United States trustee or by court. The primary role of a chapter 7 trustee is to govern the bankruptcy case and liquidate debtor's all nonexempt assets in a manner that maximizes the return to the debtor's unsecured creditors. The distribution of the property is governed by the Bankruptcy Code, which sets forth the order of payment of all creditors' claims. There are six classes of claims, and each class must be paid in full before the next lower class is paid anything. The debtor is not really interested how the trustee manages the assets. The debtor's major interests in a chapter 7 case are in retaining exempt property and in getting a discharge that covers as many debts as possible.

A discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor or his property to collect the debts. The bankruptcy law regarding the scope of a chapter 7 discharge is complex, and debtors should consult competent legal counsel before filing. In most cases the discharge will be granted relatively early in the case, that is, 60 to 90 days after the meeting of creditors.

In certain states, secured creditors may retain some rights to seize pledged property, even after a discharge is granted. Depending on individual circumstances, a debtor wishing to keep possession of the pledged property, may find it advantageous to “reaffirm” the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will pay all or a portion of the money owed, even though the debtor has filed bankruptcy. In return, the creditor promises he will not repossess or take back any property as long as payments are made. However, the debtor may repay any debt voluntarily, regardless of signing or not signing of reaffirmation agreement.

Nonetheless, it's important to know that a discharge under chapter 7 does not release an individual debtor from certain specific types of debts, which include:

Debts forgotten to be listed in bankruptcy papers, unless the creditor learns of the bankruptcy case;
Child support and alimony;
Debts for personal injury or death caused by intoxicated driving;
Student loans, unless it would be an undue hardship for debtor to repay;
Fraudulently incurred credit card debt;
Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
Recent income tax debts and all other tax debts.