Chapter 7 Bankruptcy Process

Chapter 7 Bankruptcy

Are you considering bankruptcy? Do you need more information regarding how to file bankruptcy? Have you already filed and have a question about what happens next?

This page explains the key elements of the Chapter 7 bankruptcy process, including the requirements of the bankruptcy laws enacted by the federal government.

Even before declaring bankruptcy, there are several steps that must be taken. Some steps are optional, but others, such as credit counseling, are required.

Likewise, after the Chapter 7 bankruptcy petition is filed, the debtor has several obligations to fulfill. Attending the Section 341 meeting of creditors and a pre-discharge bankruptcy education course are two of those requirements.

After a person receives his or her discharge, the case may remain open for several months, and in some circumstances, even years, as the case trustee works to liquidate Chapter 7 bankruptcy assets and distribute payment to creditors.

Although the bankruptcy process is different from case to case, the purpose of this article is to explain the main events that will happen in a normal Chapter 7 bankruptcy proceeding.

Bankruptcy Alternatives

Filing for Chapter 7 relief is the last resort, not a quick, easy fix. Although your situation may feel hopeless, there are effective bankruptcy alternatives and strategies for debt management that should be thoroughly investigated.

Chapter 7 has a lasting, long-term effect on a person’s creditworthiness. It remains on a person’s credit record for up to ten years.

After a Chapter 7 petition is filed, a person’s credit score, commonly referred to as a FICO score, may initially drop as much as 200 points. Obtaining loans or other credit at reasonable rates will be very difficult, if not impossible.

For these reasons alone, the following bankruptcy alternatives should be considered.

Create a Budget

Creating a budget is a simple way to explore bankruptcy alternatives. A well-prepared budget can help point out unnecessary expenses. To create a budget, track every expense, no matter how minor, for one to two months. At the end of this time period, take some time to analyze the results.

If expenses are greater than income, identify expenses that can be eliminated or reduced. In addition, think of ways to bring in additional income, such as asking your current employer for a raise or taking on a second job.

After making changes on paper, use the budget as a guide to make changes in daily life.

Negotiate with Lenders

If you are experiencing a temporary setback, such as a layoff or medical illness, and normally pay bills on time, negotiating with creditors is an effective bankruptcy alternative. Many creditors are willing to lower monthly payments or extend payment time, as long as they are notified of the situation and reassured that you will be able to meet the terms of the new credit arrangement.

Debt Consolidation

Although debt consolidation is another way to avoid bankruptcy, it should be carefully considered. When debt is consolidated, credit card balances and other loans are combined into one bill. Many times the creditor will require the person receiving a consolidated loan to use his or her house or other assets as collateral. This may jeopardize your ability to keep your house or other assets if a bankruptcy petition is filed at a later date.

Credit Counseling

Reputable creditor counseling organizations offer free money management advice and budgeting assistance. After reviewing your situation, a good credit counselor can provide specific bankruptcy alternatives for your individual situation. Although credit counseling can be provided online or by phone, the best type of credit counseling is in person.

Unfortunately, not all credit counseling organizations are legitimate. Before using the services of a credit counselor, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau.

Some credit counseling organizations offer debt management plans (also known as “DMP”s) to their clients. In a DMP, the credit counseling organization often negotiates better terms, such as interest rates and fees, with the client’s creditors. The client deposits monthly payments with the credit counseling organization, who then disburses the funds to creditors based on a predetermined schedule.

The new bankruptcy laws also require pre-bankruptcy credit counseling from a government-approved organization. This requirement is discussed in more detail in Part 3 of this Bankruptcy Process section.

Other Bankruptcy Alternatives

A debt negotiation program is another type of bankruptcy alternative. Do not confuse debt management plans (discussed above) with debt negotiation programs. Most debt negotiation programs charge substantial fees and do not deliver on their promises.

If you are considering using a debt negotiation program, proceed with caution. Check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau.

Avoiding Bankruptcy

How to avoid bankruptcy? As you can see, there are several different steps that you can take in an effort to avoid this process.

Sadly, for many people, their situation becomes so unendurable that filing bankruptcy may be their only realistic solution and chance for any kind of a better future. In those instances, a better question than “Can I avoid bankruptcy?” would be “Is there life after bankruptcy?”

Bankruptcy Credit Counseling

The bankruptcy laws require that potential filers (with limited exceptions) take a credit counseling course from a government-approved agency within six months prior to filing bankruptcy.

Approved bankruptcy credit counseling agencies vary from state to state. Use the state links in the left column to locate an approved provider in your area.

There is a small fee (approximately $50.00) for pre-bankruptcy credit counseling, but this fee may be waived depending on your ability to pay. If you are requesting a fee waiver, make sure it is requested and received from the credit counseling provider prior to the start of the counseling session.

A typical bankruptcy credit counseling session lasts approximately sixty to ninety minutes and can take place in person, by telephone, or online. As part of its pre-bankruptcy counseling services, the agency will discuss bankruptcy alternatives and provide you with an evaluation of your financial situation, a personal budget plan, and a certificate of completion.

You will need to provide the certificate of completion to your attorney to file with your bankruptcy petition. In addition, although debt management plans (discussed in Part 2 of this section) are not a bankruptcy requirement, if one is used, a copy of the plan must also be provided to the Court when the bankruptcy petition is filed.

Bankruptcy Process

Bankruptcy information will be exchanged between you and an attorney during an initial consultation. An initial consultation is the first step to retaining a lawyer. Some bankruptcy attorneys charge nothing for the initial consultation, while others charge a small fee.

Bankruptcy Information – Initial Consultation Tips

Use the initial consultation to your advantage. This meeting is your opportunity to “interview” the bankruptcy lawyer to make sure he or she is a good fit, as well as an opportunity to learn Chapter 7 bankruptcy law information.

Before meeting with the attorney, prepare a list of questions and issues that you want to discuss. Also, do not be afraid to inquire regarding legal fees and possible payment plans.

At the initial consultation, evaluate how well the attorney communicates with you. Are you comfortable discussing your situation with him or her? Does he or she answer your questions and present bankruptcy information in clear, understandable terms?

Also ask to meet anyone else that will be working on your case, including the bankruptcy attorney’s assistant or paralegal.

If you have concerns, meet with other bankruptcy attorneys in your area until you find someone that you are comfortable hiring.

When you schedule your initial consultation, you will probably be asked to bring along documentation regarding your financial situation. Do not ignore this request. The attorney needs this bankruptcy information in order to evaluate your case. The documentation requested will likely include the following:

Bankruptcy Information – Assets

• One month of pay stubs for you and your spouse (even if your spouse is not filing)
• Your tax returns for the past two years
• Most recent statements for any bank accounts
• Most recent statements for any investment accounts
• Information regarding the value of any other investments, such as stocks and savings bonds
• Information regarding the cash value and beneficiaries of any life insurance policies
• Information regarding your house, including recent appraisals and a copy of the deed showing how you hold title
• Information regarding vehicles, including make, model and mileage

Bankruptcy Information – Debts

• A recent bill from each creditor or a list of creditors and the amount you owe
• Mortgage information, including the interest rate and the payoff for any loans secured by your house
• Car loan information, including interest rate and payoff for each vehicle
• Delinquent tax notices
• Unpaid property tax notices
• Information regarding any lawsuits or judgments filed against you

It is also important to provide any requested bankruptcy info to your attorney as soon as possible so that he or she can make a determination regarding whether you can even file a Chapter 7 bankruptcy petition. Under the new bankruptcy laws, there are restrictions:

• Your current monthly income (average income received in the six months prior to filing bankruptcy) must not be more than the state median; or
• If your current monthly income is more than the state median, then a means test is used to determine whether a Chapter 7 bankruptcy filing is presumed to be an abuse of the Bankruptcy Code.

Bankruptcy Questions

Let’s discuss the types of bankruptcy questions you will need to answer.

After you retain a lawyer, he or she will request that you take home and complete a lengthy form. Typically, these questionnaires are several pages long and require that you provide substantial details regarding income, assets, debts, and other relevant information, such as transfers of property.

Plan on spending several hours, and possibly several days, to complete this questionnaire. If overwhelmed, break it down into manageable sections. For example, commit one day to complete answers about income, another day to work on assets, and a third day to list creditors and balances.

As you work on the bankruptcy questions, there may be certain parts that need additional clarification or explanation. Make a list. Before finalizing your answers, contact your attorney or his or her paralegal for any clarification you still need.

There are a few things that you need to keep in mind when completing your questionnaire:

1. Answer all bankruptcy questions honestly.

Bankruptcy documents filed with the Court are signed under the “penalty of perjury”. If you knowingly or fraudulently submit inaccurate information, such as failing to disclose assets, reporting income wrong, or using a false Social Security number, you may be fined and even imprisoned.

The U.S. Trustee Program, a division of the U.S. Department of Justice, randomly audits Chapter 7 cases and will prosecute fraudulent behavior.

2. Answer all bankruptcy questions thoroughly.

The questionnaire may seem overwhelming. Avoid the temptation to rush through it. Answer every question thoroughly. Be completely honest and do omit any information.

If your attorney does not order a copy of your credit report, you should do this, in order to make sure you list all creditors. Make sure you also list debts owed to family members, friends and relatives, as well any debts that are disputed or the subject of a pending lawsuit.

3. Answer all bankruptcy questions accurately.

Make sure all information is listed accurately. For example, if an inaccurate address is provided for a creditor, that creditor may not receive notice of your Chapter 7 filing.

4. Provide copies of supporting documentation.

When possible, provide your attorney with copies of supporting documentation, including:

• bank statements
• loan paperwork
• credit card bills
• tax returns
• pay stubs
• recent appraisals and asset valuations
• relevant receipts

Make sure you keep the original documents for your records.

5. Make sure your bankruptcy answers are legible.

Your attorney, or a member of his or her staff, will use the questionnaire to complete your documents for filing with the Court. Make sure that all answers to these bankruptcy questions are legible to avoid unnecessary delays and errors.

Bankruptcy Forms

The next step in this process is the review and signing of your bankruptcy forms.

After completing and returning the questionnaire to your attorney, he or she (or a member of his or her staff) will draft a copy of all the pleadings that are required to initiate a case.

The pleadings required for a Chapter 7 case generally consist of three main sections:

1. Petition

This section contains basic information about the individual or entity filing Chapter 7, including name (and aliases), address, last four digits of social security number, and prior bankruptcy information.

2. Schedules

The bankruptcy schedules contain the bulk of information regarding the filer’s assets, creditors and current financial situation:

• Schedule A – Real Property (real estate)
• Schedule B – Personal Property (all other property, tangible and intangible)
• Schedule C – Exempt Property
• Schedule D – Secured Claims (i.e. mortgages and car loans)
• Schedule E – Unsecured Priority Claims (i.e. unpaid taxes, child support)
• Schedule F – Unsecured Nonpriority Claims (i.e. credit card bills, medical bills)
• Schedule G – Executory Contracts and Unexpired Leases
• Schedule H – Codebtors (i.e. guarantors and co-signors other than spouse in a joint case)
• Schedule I – Current Household Income
• Schedule J – Current Household Expenses

3. Statement of Financial Affairs

The Statement of Financial Affairs provides other information, such as:

• Year-to-date income and income for two years preceding bankruptcy filing
• List of creditors paid $600 or more in 90 days preceding bankruptcy filing
• Lawsuits and other administrative proceedings
• Gifts and charitable contributions made in year preceding bankruptcy filing
• Fire, theft, casualty and gambling losses
• Payments related to debt counseling or bankruptcy
• Information regarding property transfers
• Financial accounts closed within one year preceding bankruptcy filing
• Property held for others
• Prior addresses for three years preceding bankruptcy filing
• Information regarding non-filing spouse and former spouses
• Business information

In addition to these bankruptcy forms, there are other required documents that will be filed with the Court, including a Statement of Social Security Number, Statement of Current Monthly Income, creditor matrix, a certificate regarding pre-bankruptcy credit counseling, and more. Each case is different. Your attorney will know exactly what bankruptcy forms are required for your situation.

To view free forms that are commonly used, see the U.S. Bankruptcy Court Forms Manual maintained by the Administrative Office of the U.S. Courts.

After the bankruptcy forms are drafted, your attorney will request that you review them. Many times, he or she will schedule an appointment so that they can be reviewed in person. If there are no significant time-consuming changes, your attorney will likely make the changes during the meeting and have you sign the documents for filing with the Court.

When you sign the bankruptcy forms, make sure that all information is accurate and complete. These documents are signed under the penalties of perjury. There are harsh penalties, including stiff fines and even imprisonment, for fraudulently submitting inaccurate information or failing to disclose required information.

If you need to double-check your records, let your attorney know. He or she may still have you sign the documents, but will not submit them to the Court until you verify that the information is correct.

In most jurisdictions, bankruptcy forms are now filed electronically with the Court. This means that they may be submitted the same day, and sometimes within minutes, of signing. For this reason alone, make sure you speak up if you need to double-check your records.

Debt Counseling Agency

What do you need to know about a debt counseling agency as part of the personal bankruptcy process?

In addition to taking a pre-bankruptcy credit counseling course (see Part 3 of this Bankruptcy Process Section), the bankruptcy laws enacted in 2005 require that debtors (with limited exceptions) take a pre-discharge bankruptcy education course from a government-approved debt counseling agency after filing a Chapter 7 bankruptcy petition and prior to receiving a discharge.

Approved providers vary from state to state. Use the state links in the left column to locate an approved debt counseling agency in your area.

Other Pre-Discharge Bankruptcy Education Course Information

It typically costs $50 – $100 for pre-discharge bankruptcy education, but this fee may be waived depending on your ability to pay. If you are requesting a fee waiver, make sure it is requested and received from the debt counseling agency prior to the start of the session.

A typical pre-discharge bankruptcy education course lasts approximately two hours and can take place in person, by telephone, or online. As part of its services, the debt counseling agency will provide information regarding developing a budget, managing money and using credit wisely, as well as a certificate of proof.

This certificate of proof must be filed with the Court before it will grant a Chapter 7 bankruptcy discharge.

Bankruptcy Liquidation

The Bankruptcy Liquidation Process – In a Chapter 7 bankruptcy proceeding, the trustee assigned to the case is responsible for liquidating any nonexempt assets. This means that he or she will take possession of any assets with nonexempt equity, reduce them to cash, and then distribute the cash proceeds to creditors.

Many Chapter 7 bankruptcy cases are deemed “no-asset” cases. In these types of cases, the bankruptcy trustee will abandon nonexempt assets after making a determination that the cash proceeds after liquidation are insufficient to warrant distribution to creditors.

To make a determination regarding whether to proceed with bankruptcy liquidation, the trustee may request additional documentation or information so that he or she can investigate the value of non-exempt assets.

If the bankruptcy trustee determines the value of non-exempt assets is sufficient for administration to creditors, he or she will decide the case is an “asset” case and will proceed with the bankruptcy liquidation process. This process is subject to the rights of any secured creditors, as well as the debtor’s right to retain certain property pursuant to exemption laws.

If you are reluctant to turn over an asset to the bankruptcy trustee, discuss your options with your attorney. In some circumstances, the trustee may allow you to “purchase” the nonexempt asset from the bankruptcy estate. For example, if you own a motor vehicle with $1000 nonexempt equity, the trustee may allow you to keep the vehicle if you pay the nonexempt portion of $1000 to the bankruptcy estate.

However, the trustee is not obligated to enter into such an agreement. It is still imperative that you cooperate fully with the trustee and turn over any assets required for bankruptcy liquidation.

Exemption laws vary from state to state, therefore it is best to talk to an attorney in your area to determine what items you may be required to turn over to the trustee for bankruptcy liquidation. You may also want to check out the state links on the right for more information regarding bankruptcy Chapter 7 exemptions.

Common examples of assets that are subject to Chapter 7 bankruptcy liquidation include:

• tax refunds
• bank account funds
• stocks and bonds
• motor vehicles
• real estate
• jewelry
• antiques and collectibles
• cash value of some life insurance policies
• proceeds of certain types of lawsuits
• other personal property

The bankruptcy trustee will also investigate payments and transfers to creditors and other third parties. In some circumstances, he or she may determine that these are also assets of the bankruptcy estate and demand turnover from the creditor or other third party.

The actual liquidation process varies based on the type of asset that is turned over to the bankruptcy estate. Tax refunds, for example, are liquidated by depositing the refund check into the bankruptcy estate’s bank account. Motor vehicles and other personal property, however, may require that the trustee schedule a bankruptcy auction and provide notice to all parties on the creditor matrix.

Chapter 7 Bankruptcy Trustee

The Chapter 7 bankruptcy trustee assigned to a case is responsible for liquidating any nonexempt assets. If he or she determines the case is an “asset” case, they will proceed with the liquidation process.

Although the debtor’s participation in the liquidation process is minimal, it can be a major source of concern and confusion. The case can drag out for months, and sometimes even years, as the Chapter 7 bankruptcy trustee works to liquidate assets and distribute payment to creditors. To add to the confusion, the debtor will likely receive written notices when the trustee takes certain actions.

Distribution of Nonexempt Assets to Creditors

The liquidation process varies from case to case, but there are a few key things that happen. Following is a basic outline of the steps taken in a standard liquidation:

1. A demand turnover of the nonexempt asset(s) will be issued.

After the commencement of the case, the trustee assigned to the case may demand the turnover of certain assets. This is explained in more detail in the previous section of this article.

2. An inventory and request for notice will be filed with the Court.

After the Chapter 7 bankruptcy trustee makes a determination that assets will be liquidated for the bankruptcy estate, he or she will file a document with the Court listing the potential assets and requesting that the bankruptcy clerk notify creditors and set a claim deadline.

3. The Clerk’s office will mail proof of claim form to all entities listed on the creditor matrix and set a claim deadline.

Creditors must complete a proof of claim form and return it to the Court by the deadline to be eligible to receive any distributions from the liquidated assets. Click here to view a sample proof of claim form.

4. The Chapter 7 bankruptcy trustee will review claims.

After the claims bar deadline expires, the trustee will review all proofs of claim filed in the case. If a determination is made that a claim is insufficient or incorrect, he or she will either request additional documentation from the creditor or file an objection.

After all proof of claim issues have been resolved, the bankruptcy trustee will file a document with the Court listing allowed claims.

5. An application for compensation will be filed with the Court.

Chapter 7 bankruptcy trustee receives a commission based on the amount of money collected for the bankruptcy estate. In order to be paid this commission, he or she must file an application for approval requesting that the Court enter an order allowing the payment. The commission is paid from the bankruptcy estate’s account.

When the case is closed, the bankruptcy trustee also receives a portion of the Chapter 7 bankruptcy filing fee. This amount is paid regardless of whether any assets were liquidated.

6. The final report will be filed.

The trustee must prepare and file a final report before final distribution to creditors can be made. Among other requirements, the final report lists how the trustee plans to disburse funds. In most circumstances, a summary of the final report must be provided to creditors, and a deadline for any objections will be set.

7. Bankruptcy estate funds will be distributed.

If no objections to the final report are filed, the trustee will proceed with distributing funds to creditors based on the allocation included in the final report.

8. The Chapter 7 bankruptcy trustee will file a final account.

After all bankruptcy estate funds have been disbursed and the checks have cleared, the trustee will file a final account. This is usually the last action taken before the case is closed.

9. Other pleadings.

In addition to the above, the bankruptcy trustee may also file other pleadings based on the individual circumstances of each case and local rules. Common examples include:

• applications to employ professionals (i.e. realtors, auctioneers, accountants, lawyers)
• motions to sell assets (by auction, private sale, etc.)
• motions to compel
• preference complaints

As always, if you have any questions or concerns, contact your attorney.

Chapter 7 Bankruptcy Discharge

The main reason one goes through the Chapter 7 bankruptcy process is in order to receive a Chapter 7 bankruptcy discharge. When a debt is discharged, the debtor is no longer legally required to pay the debt.

When a discharge is granted, the Court will send a copy of the order to all parties listed on the matrix, including the debtor, his or her attorney, creditors, and bankruptcy trustee. The debtor should file these documents away in a safe, accessible place.

Chapter 7 Bankruptcy Discharge – What Doesn’t Get Discharged

Not all types of debt are dischargeable. If a debt is not discharged, the debtor is legally obligated to repay it. For almost every rule, there is an exception, so talk to your attorney regarding what debts will or will not be discharged for your particular situation.

Examples of debts that are generally not subject to a Chapter 7 bankruptcy discharge include:

• most taxes and tax-related debts
• debts for domestic support obligations, such as child support and alimony
• most student loans
• governmental fines and penalties
• debts for malicious or willful injury to others or others’ property, such as criminal restitution
• debts resulting from personal injuries caused by driving while intoxicated
• debts owed to most tax-advantaged retirement plans
• debts that the debtor has reaffirmed in compliance with the Bankruptcy Code, such as a mortgage or auto loan
• some debts that are not listed properly in the bankruptcy schedules

Chapter 7 Bankruptcy Discharge Timeline

A Chapter 7 bankruptcy discharge is generally entered approximately four months after the bankruptcy petition is filed. The entry of the bankruptcy discharge may be delayed for various reasons, including the following:

• the failure of the debtor to comply with bankruptcy requirements, such as attending a pre-discharge bankruptcy education course;
• a complaint objecting to discharge filed by a creditor or other interested party;
• a motion to extend the time to file a complaint objecting to discharge filed by the bankruptcy trustee or other party (for example, in an effort to make the debtor cooperate or to turn over assets);
• a pending motion to dismiss (for example, if bankruptcy fraud or abuse is under investigation).

Bankruptcy Discharges – Other Issues

A Chapter 7 bankruptcy discharge may also be revoked after it is granted. For example, if the debtor fails to turn over an asset to the bankruptcy estate, the trustee may file a complaint to revoke the debtor’s discharge for failure to cooperate.

Although the debtor is not legally obligated to pay a debt after it is discharged, he or she may voluntarily repay any discharged debt. The creditor then may accept or reject the payment at its own discretion.

Order Closing Bankruptcy Case

Order Closing Bankruptcy Case – The final step in a normal Chapter 7 proceeding is the Court’s entry of the order closing the case – now it’s time to begin life after bankruptcy.

As discussed previously in this 13-part Chapter 7 Bankruptcy Process section, the entry of the order may happen several months, and in some cases, even years, after the bankruptcy discharge is granted.

It is not necessary to wait for the order closing the case to start moving forward. You have probably heard the phrases that bankruptcy gives a person “a fresh start”, “a clean slate”, “a second chance”.

Is There Life After Bankruptcy?

Yes, there is life after bankruptcy. But it’s important to take advantage of the opportunity that bankruptcy affords to help make that life as good as is possible.

After all, if your bankruptcy was the result of unrealistic spending decisions, you do not want to make the same mistakes again – to be counting down the months until you can file a petition for relief again. Resolve to make the necessary changes now – and to educate yourself regarding responsible ways to build credit.

By following a budget, paying all bills on time, not applying for too much credit all at once, and using only a small portion of your credit limit on existing cards, you will see gradual and consistent increases in your credit score.

An improved credit score means that not only will you qualify for loans, such as auto or mortgage loans, but you will also qualify for better interest rates.

After undergoing this process, your situation should be better than the one you had before bankruptcy. To put things in perspective, I once read some good advice. Here it is:

Put God first, people second, money third, and all the things that money can buy – last.

It’s good, sensible advice. There may be hurdles down the road – unemployment, medical problems, and other obstacles. You never know what life will throw at you. However, by taking advantage of this fresh start, hopefully, you will be better prepared to face them when they happen.