Bankruptcy is a process established under Federal Law that is designed to allow individuals, businesses and other entities to obtain a “Fresh Start” with their financial situation. Such a Fresh Start is very important in today’s economy, with debt continually increasing and income decreasing compared to the cost of living.
Chapter 7 is a form of Bankruptcy that usually provides for a “discharge”, or elimination, of all or most debts in exchange for a “liquidation” of certain assets. In almost every case filed for an individual or small business, NO assets are subject to this liquidation. The result is a fresh start where all or most debts are no longer owed and no property is lost in the process.
In Chapter 7, most debts are discharged. Certain debts, such as recent taxes, past-due support obligations, student loans or other educational debt, debts incurred as a result of driving while intoxicated, or debts incurred as a result of fraud are not discharged. (See article called “What Debts are Not Discharged?”) It is important that anyone considering Chapter 7 consult an experienced bankruptcy attorney to obtain advice about their own particular situation.
The reason that most people do not lose assets in bankruptcy is because there are laws that protect certain assets, called “exemptions”. The typical list of exemptions will cover personal effects, like clothing and household items, a certain amount of jewelry, a vehicle with a certain value, certain tools of the trade, rights to receive benefits from a retirement plan and a substantial amount of other assets. (Please see article “Can I really keep my personal assets if I file bankruptcy?” and watch for the future article “What Property is Exempt?” for more detail). It is very important that a person contemplating bankruptcy consult with an experienced bankruptcy attorney to review their available exemptions to avoid any unnecessary loss of assets.
An objective analysis of income and expenses called the “Means Test” is required to file Chapter 7. If that test says you can afford to pay your creditors, you must either file under Chapter 13 (Watch for the future article “What is Chapter 13” for more details) or you risk having your case dismissed by the Court as an “abuse of the bankruptcy process”. Simply put, if that test says you can pay your creditors, you are not supposed to be using the Chapter 7 process. Knowledge of how that test works and how to “pass” the test are extremely important for success in Chapter 7, so it is vital to have the assistance of an experienced bankruptcy attorney. Watch for the future article “Means Test Basics” for more information.
The Chapter 7 process involves obtaining good legal advice, planning for the time of filing and how to claim exemptions, gathering the necessary detailed information from the client and other sources, preparing the documents that must be filed with the Court, filing the case, providing required information to the court-appointed Trustee, providing required information to certain creditors, attending the Meeting of Creditors, making sure all certificates are filed with the court and obtaining the Discharge of Debts and Final Decree. Although this process can be complicated, having an experienced attorney assisting you every step of the way can make it seem simple.