Chapter 7 bankruptcy involves the liquidation of the debtor’s non-exempt assets and the management of the case by a trustee who sells these assets and uses the proceeds to settle claims that have been properly filed by the creditors. Some of the debtor’s assets are exempt to allow the debtor a clean start. These can include a main vehicle for transportation to and from work, clothing, home furnishings and appliances, pensions and some benefits. However, in many cases, debtors do not have non-exempt assets. The law allows states to provide their own list of exemptions, and debtors must choose between the federal and the state exemptions. In some jurisdictions, however, debtors must use the state exemption package. At the end of the process, some remaining unsecured indebtedness is discharged.

Before the trustee accepts a petition, the means test is applied to filers whose income exceeds their state’s median income. This test seeks to identify any abuses to the use of the Bankruptcy Code. The test checks if the debtor’s current monthly income over five years is greater than $12,850 or 25 percent of the nonpriority unsecured debt when that amount is at least $7,700.

If a debtor does not pass the means test, the petition is then converted to a Chapter 13 filing if the debtor approves, or it is dismissed. The debtor must also have received credit counseling within the past 180 days or, if not, must show proof that there were not enough approved credit counseling agencies available to do so. In Chapter 7 bankruptcy filings, the discharge usually comes within 60 to 90 days of the date of the initial meeting of creditors.

Who Is Eligible to File for Ch. 7?

Individuals, partnerships, corporations and limited liability companies might be eligible to file for Chapter 7. However, only the debts of consumers can be discharged under this chapter. Eligibility is also dependent on certain other conditions, including the means test and credit counseling.

Options and Alternatives

Filing for bankruptcy under Chapter 7 is not the only option available to debtors. For debtors who are involved in business, for example, a Chapter 11 filing might be a more favorable option if they want to continue in business since this type of filing might provide them with a way to restructure their obligations. Filing under Chapter 13 might be the more beneficial option for consumers who have a regular source of income, as it involves a court-approved repayment plan that lasts for either three to five years. Upon the successful completion of the plan, many remaining unsecured debt balances are discharged.

What Are the Steps for Filing? A Chapter 7 Bankruptcy Checklist

Step 1: Debtors gather information necessary to fill out the bankruptcy filing forms and schedules, including:

• A list of all creditors, the amount owed by the debtor, and the nature of the creditor’s claims.
• The source of the debtor’s income, the amount and the frequency of payment.
• A list of all of the debtor’s property
• A list of the debtor’s monthly living expenses, including the amount of money spent on food, shelter, clothing, utilities, medicine and transportation.

Step 2: Individual debtors file a petition in the jurisdiction where they live. Business debtors file the petition in the area where their main place of business is. At the same time, the debtors must file these documents with the court:

• Financial affairs statement
• Assets and liabilities schedule
• Schedule of current income and expenses
• Schedule of executory contracts and leases.

Step 3: Debtors must pay the filing fees with the clerk. Fees include:

• Case filing fee
• Miscellaneous administrative fee
• Trustee surcharge

Step 4: Debtors provide the trustee with:

• Copy of tax returns or transcripts from the most recent tax year and of any tax return filed during the proceedings.
• Individual debtors also include evidence of credit counseling within the previous 180 days and a copy of any debt repayment plan drafted during counseling.
• Statement of monthly net income, proof of payment from the debtor's employer within 60 days before the filing of the petition and a statement of any anticipated rise in income or expenses after the bankruptcy filing.

Once a petition is filed under Chapter 7, creditors cannot continue to pursue repayment through wage garnishment or other methods, including suing and calling the debtor. This stay is temporary while the petition is processed.

Secured Debt Options

Secured debt is any obligation that has collateral, such as a home or car. In a Chapter 7 bankruptcy filing, debtors have three options if they are current on their payments. They can return the property and then have the remaining debt discharged, they can reaffirm the debt and continue paying or they can redeem the debt. If debtors are not current on their payments, they can include the debt in their bankruptcy filing. However, the creditor can still repossess the property. Debtors who want to keep the property can reaffirm the loan outside of the bankruptcy filing and make up any missed payments and late fees or file under Chapter 13 instead, which can provide more options for keeping the property.

The Creditor Meeting

This meeting takes place about a month after filing for bankruptcy. It is arranged by the trustee and provides an opportunity for creditors and the trustee to question the debtor and show that the debtor is complying with all requests for information and the law.